BKNG | TRAVEL SERVICES | LUCAS OLDHAM

I am recommending a BUY of Booking Holdings (BKNG) at the current share price of $2,242.61 with a target share price of $3,514.63, presenting 56.7% potential upside as of June, 18 2021. The primary reasoning behind my recommendation is; Booking’s strong and durable competitive advantages over the industry; their historically impressive financials; and their massive growth potential coming out the covid-19 pandemic. Booking Holdings is a globally diversified company with a lucrative business model. Financially, they are fundamentally sound, boasting steady pre-pandemic growth. And most importantly, they are poised to emerge gracefully from the overall depressed state of the travel industry caused by the covid-19 pandemic.

BUSINESS DESCRIPTION

Booking Holdings is an American travel technology company that owns and operates numerous worldwide travel fare aggregators and metasearch engines including Booking.com, Priceline.com, Agoda.com, Kayak.com, Cheapflights, Rentalcars.com, Momondo, and OpenTable. They are the world leader in online travel and related services, provided to customers and partners in over 220 countries and territories. The mission of Booking Holdings is to make it easier for everyone to experience the world.

The company was founded in 1997 by Jay S. Walker as Priceline.com Incorporated in Stamford, Connecticut. Through a series of growth and acquisitions Priceline.com became Booking Holdings in 2018. Currently based in Norwalk, Connecticut, Booking employs 20,300 people worldwide. Their shares trade at $2,242.61 as of June, 18 2021. Before their revenues were ravaged by the effects of the covid-19 pandemic, they brought in $15.07B in sales in 2019. With a market capitalization of $91.4B, they are the largest and most dominant traditional travel service in the industry. The current President, CEO, and Director, Glenn D. Fogel has been at the helm since 2017. Prior to his appointment, Fogel garnered 17 years of experience at Booking as Head of Strategy and Executive Vice President of Corporate Development.

Business Segments

Booking Holdings operates through their six primary consumer-facing brands; Booking.com, Priceline, Agoda.com, Rentalcars.com, KAYAK, and OpenTable. Each of these brands offers different services fully encompassing the consumer travel experience; accommodations, ground transportation, flights, restaurants, activities, and meta search. Figure 1 gives a brief look at their service offerings umbrella. Figure 2 shows an allocation of these services.

Booking Holdings Umbrella Services by Brand

World’s leading A leading brand A leading travel brand for booking for booking rental meta-search brand accommodations cars

A leading brand for A leading brand North America’s online Asian market for dining leading discount accommodations reservations online travel brand

Figure 1: Booking Holdings Umbrella Figure 2: Services by Brand

As the world’s leading brand for booking online accommodation reservations, based on room nights booked, Booking.com has offered services for approximately 2,373,000 properties in over 220 countries and territories as of December 31, 2020. Most of Booking’s subsidiaries have a similar array of integrated services but are unique to location. Kayak provides an online price comparison service (often referred to as "meta-search") that allows consumers to easily search and compare travel itineraries and prices, including airline ticket, accommodation reservation and rental car reservation information, from hundreds of online travel platforms at once.

1 Business Model

While there are six different windows of business, each service collects revenue in the same ways. The three revenue items that Booking Holdings recognizes are Agency Revenues, Merchant Revenues, and Advertising & Other Revenues. Figure 3 shows 2019 revenue breakdown.

• Agency Revenues make up the bulk of Booking’s total revenue figure. These revenues are derived from 2019 Revenue Breakdown transactions in which Booking does not facilitate payments for services. As the primary driver of sales, agency revenues consist almost entirely of travel reservation commissions invoiced to service providers after travel is completed.

• Merchant Revenues make up the second largest chunk of Booking’s total revenue figure, but are growing at a faster rate. These revenues are derived from transactions in which Booking facilitates the payment of services, generally at the time of booking. From a cash flow Figure 3: 2019 Revenue Breakdown perspective, since Booking gets money upfront and doesn’t relinquish it to the service provider until the time 3-YR Revenue Segment Growth Rates of stay, they are able to hold onto this cash for months, mostly for free, and can use it to invest and grow the business. These revenues are also more lucrative because Booking charges fees on top of already higher commissions.

• Advertising & Other Revenues make up the smallest portion of Booking’s total revenue figure. These revenues are largely derived from Kayak’s referrals driven business and advertising placements. They are also comprised of revenues earned by OpenTable for restaurant reservation services and subscription fees. Figure 4: 3-YR Revenue Segment Growth Rates (’17-’19)

Under CEO Glenn Fogel’s leadership, Booking Holdings is taking strides to grow their merchant revenues at rapid rates. The merchant business model is far more lucrative for Booking on a commission basis, and it also improves their cash flow situation, allowing them to invest more heavily into future projects. The agency model is great for cheap growth; it is what helped Booking reach the dominant market position that it has today. But the time to capitalize on their massive scale has come, as leadership takes them in a more value-productive direction. Figure 4 shows Booking’s growing focus on merchant revenues since Glenn Fogel became CEO in 2017.

Business Growth Strategies

Booking Holdings is aiming at growth strategies through three main avenues; expanding and solidifying a uniform payment platform, continuing to develop and integrate their current services into the “connected trip”, and capturing more U.S. market share. All of their growth strategies are centered around their move towards an increasingly merchant focused business model.

Integrating a uniform payment platform can help Booking power the frictionless global marketplace that they seek to create. Booking is trying to alleviate the problem of foreign exchange complications and users not being able to pay how they want for travel. The current payment platform is catching on, but slowly. Only 22% of gross bookings in 2020 were processed on Booking’s integrated platform. However, this is up from 15% in 2019, and the figure is expected to grow in the coming years. Implementing this platform will enable merchandising capabilities that Booking hasn’t had access to historically. Most importantly, it is foundational for the “connected trip” strategy.

The “Connected Trip” is a seamless offering of multiple elements of travel, and creating it is Bookings long-term strategic goal. It will simplify and improve all aspects of the travel experience including: discovery, planning, booking, coordinating itineraries among travel service providers, automatic rescheduling/rebooking, etc.

2 Capturing a greater share of the U.S. market is an imperative growth strategy for Booking for numerous reasons. Firstly, Booking trails competitors Expedia and Airbnb in terms of U.S. market share. While the U.S. hotel market is not quite as profitable for travel fare aggregators like Booking and Expedia when compared to the European market, mainly due to the dominance of hotel chains in the U.S., the potential for Booking to tap into the U.S. alternative accommodation market is promising. And this is what leadership is trying to do. In order to penetrate the market Booking will focus on product improvements, raising consumer awareness of this type of inventory, and supply acquisition. They are planning to work with professional property management partners to grow and acquire this supply of single-home properties. Additionally, as a result of the covid-19 pandemic and associated regulations there has been a shift in favor of domestic travel and alternative accommodations, a signal for Booking to enter into the U.S. space where they currently lack market share. To paint a picture of the growth potential; 41% of Airbnb’s revenue comes from its U.S. segment. That 41% is larger than the entire European market where Booking currently has a strong foothold. This implies that Booking has an opportunity to double their alternative accommodation business by penetrating into the U.S.

Business Risk Factors

Reliance on an industry bounce back: Booking has a heavy reliance on the overall travel industry getting back on its feet as soon as possible. If government regulations and social distancing sentiments continue to stifle the travel industry at large, it will take Booking longer to return to their pre-pandemic scale. More in “Industry Overview”.

Competitors: Booking faces competition from all angles. Expedia is a their main direct competitor, and currently holds a majority U.S. market share. If Booking fails to expand more prominently into the U.S. and stagnates growth in other global markets, their overall industry market share dominance could be threatened. Airbnb is spearheading the rise of alternative accommodations, a market that Booking is also competing in. Google could continue its dive into successful reservation meta-search applications such as Google Flights. Their continued expansion into the space could take significant market share away from Booking. Lastly, many hotel chains, especially in the U.S., are developing and facilitating their own direct channels for travelers. If they can create enough consumer awareness and drive enough traffic to their own flagship sites, there would be no need for a majority of Bookings services.

COVID-19 Effects on Finances: The adverse impacts of the covid-19 pandemic could distress liquidity, credit rating, and foreign exchange rates. The ensuing volatility in global markets has made access to capital less certain and more costly. Booking currently has $2B available under its revolving credit facility, representing around 15% of their total liquidity, with a $4.5B minimum liquidity covenant. A downgrade in credit rating from their current A- status could likewise harm access to capital. Lastly, because a large majority of Bookings business comes from outside the U.S. they are exposed to swings in currency rates, which are amplified by pandemic-driven market uncertainty.

INDUSTRY OVERVIEW & COMPETITIVE POSITIONING

Booking Holdings has a dominant foothold in the global industry for accommodation reservations. Figure 5 shows their 2019 market share 2019 OTC Market Share compared to major competitors. The industry of online travel companies (OTC’s) provide compelling value to consumers by enabling end to end service and simplifying shopping around in a fragmented landscape. Ease of use is an important distinction; while the overall industry is heavily price competitive and barriers to entry are low, OTCs benefit from a marketplace network effect. Consumers want to shop where all their needs can be efficiently met, leading travel service providers to list on the largest OTCs, and the cycle continues.

It is no secret that Booking, along with the entire travel industry, took heavy hits as a result of the covid-19 pandemic. 2020 brought the biggest disruption to modern global travel the world has ever seen. But there is light at the end of the tunnel. Travel restrictions within the Figure 5: 2019 OTC Market Share by revenue domestic U.S. are already largely lifted, but many international limits are still in place. Experts are aiming at a return to somewhat normalcy by the end of 2021 and into 2022, as vaccine rollouts rapidly become more widespread and pent up demand for travel is unleashed. In March 2021 U.S. travel spending tallied $69.5B, significantly higher than the previous four months, but still 31% below March 2019 levels. 3 Competitive Landscape

Booking’s main competitor is Expedia, who has fairly more brands under its umbrella. Figure 6 shows Booking vs. Expedia in terms of brands. While their greater number of windows seemingly allows them to cover a broader market with their service offerings, it also damages Expedia’s overall brand awareness and recognition. Despite this, Expedia currently holds a larger U.S. market share, while Booking is larger worldwide. Expedia also has a closer split between Agency and Merchant revenues, something that Booking is making strides towards now that they have scaled up enough to do so. Expedia also offers loyalty programs with incentives through many of their sites. All in all, the two services are very similar in terms service offerings and strategic goals, but very different financially.

Airbnb operates in the alternative accommodations market, which they fundamentally created. The growing trend of homeowners leasing out their unused living spaces is staggering, and it is what pumps Airbnb’s valuation up so high to its current Enterprise Value of $114B. Even though Booking records 3x Airbnb’s pre-pandemic revenues, their Enterprise Value is 15% less. Many indicators point to Airbnb being overvalued, but their innovation and leadership in a rapidly growing market that they created is undoubted. Either way, one thing is clear; the market for alternative accommodations is growing at immense rates worldwide, and Booking is well poised to dig their teeth into a large chunk of that market share. Figure 6: Booking vs. Expedia Brand Comparison Looming competition comes from Google and established hotel chains. While any damage done has been virtually immaterial, Google has already created a widely used meta-search engine for flights. While not at the forefront of Google’s growth objectives, breaking into these markets could cause serious disruption. Likewise, many hotel chains in America are trying to cut out the middle-man and increase direct bookings with their own online services.

FINANCIAL STATEMENT ANALYSIS

Revenue & Growth Revenue Growth since 2016 As the leading revenue generator among its competitors, $15,066 $14,527 Booking Holdings has recorded +$10B per year in sales since +15% CAGR 2016, baring 2020. The pandemic hit Booking hard, draining $12,681 Consensus revenues 55% from 2019 highs. Despite months of the worst Projections $10,743 -55% from 2019 travel stagnation in history, Booking still managed to collect $9,451 $6.8B in sales in 2020, a testament to management’s relentless efforts to remain efficient. Revenue is expected to $6,796 rebound nicely in 2021 as vaccine rollouts and regulation leniency spur a resurgence in travel demand. Consensus projection for 2021 revenue is $9.45B, up nearly 40% from 2020’s dip. The current market valuation suggests a return to pre-covid revenues by 2025-2026, a modest turnaround for the hardest hit industry of the worst pandemic the world has ever seen. Figure 7 shows revenue growth since 2016.

As discussed in the “Business Model” section, Booking Figure 7: Revenue Growth since 2016 recognizes three different revenue streams; Agency, Merchant, and Advertising & Other. Leadership has made it clear that they intend to focus growth on the Merchant Revenue segment, which has increased nearly 80% in the period 2017-19. As mentioned earlier, Merchant revenue is far more lucrative and efficient for continued growth. Figure 7 also shows revenue segment breakdown.

Cash Flows & Operating Activities

Booking has historically healthy FCF margins of around 31% per year since 2010, baring 2020. This is an impressive metric as it shows that Booking generates a lot more cash than it burns. These consistent free cash flows are derived from the steadily growing business, which now aims to ramp up even more emerging from the pandemic.

4 Booking’s EBITDA margin has averaged around 37% per year since 2012, 7 percentage points higher than the industry benchmark. This signals Booking’s operational efficiency at turning sales into profits, and highlights the fact that they consistently outperform their competitors in doing so. Expedia’s EBITDA margin is around 15% over the same period.

ROIC & Debt

Booking’s 5 year average for ROIC is 19%, excluding 2020. This metric is important to show how efficient management is at allocating capital to profitable investments. When looking at Booking’s WACC of 6.5%, it is clear that leadership is doing an excellent job of investing capital and creating value for the company.

As of December 2020, Booking has a current ratio of 3.6, signaling a healthy liquidity situation. While liquid on the balance sheet, the pandemic hammered Booking’s fixed-charge coverage ratio, which sits at 1.3, down from previous years consistent 20’s. Booking’s decline in 2020 earnings dragged this number down, but the fact that they can continue cover debt with earnings alone amidst a global pandemic is impressive. Booking has total debt of $12B, most of which is tied up in LT Bonds expiring at fairly consistent rates through 2028. They have total liquidity of $13B, including nearly $2B in credit revolvers. This ratio of debt to liquidity signals healthy prudent management.

LT Debt by Maturity Summary FCF & FCF Margins (‘10-‘20)

Figure 8: FCF & FCF Margins (’10-’20) Figure 9: LT Debt by Maturity Summary

VALUATION

The valuation of Booking Holdings is based upon a discounted free cash flow model that projects ten years into the future and arrives at a terminal value into perpetuity. Other metrics used in the model are the company’s WAAC of 6.5% (as of June, 18 2021), total debt of $12.54B, and total cash of $11.08B. These numbers are courtesy of FactSet. The speed at which Booking can return to pre-pandemic levels of revenue is the main driver of each case.

Base Case – meant to reflect the current market share price of $2440.44. This case sees modest 2021 revenue growth as travel begins to make a comeback. FCF’s will settle slightly under historical averages. Revenue will reach pre-covid levels by around 2026. Booking will then grow revenues at 2% and collect FCF’s at 30% into perpetuity.

Figure 10: Base Case Summary Table Bear Case – meant to reflect an environment heavily effected by covid for years to come. This case sees tiny revenue growth in 2021, and taking until 2028 to reach pre-pandemic levels. FCF’s will remain largely constant.

Bear Case

Figure 11: Bear Case Summary Table Bull Case – meant to reflect an environment quickly emerging from the pandemic. This case sees a significant bounce back in 2021 revenues, per FactSet analyst consensus, as travel restrictions and sentiments continue to dissipate. Pre-pandemic revenues will be exceeded by 2024. FCF’s will remain largely constant.

Bull Case

Figure 12: Bull Case Summary Table 5