RESEARCHSeptember REPORT24, 2018 ASeptember Travel Industry 24, 2018 Leader Stock Rating BUY Price Target USD $2,547 Bear Price Bull Case Target Case $2,343 $2,547 $2,793 Ticker BKNG Booking Holdings Inc. Market Cap (MM) $92,890 A Travel Industry Leader EV / EBITDA 16.5x P / E 22.8x Booking Holdings operates several Online Travel Agencies (OTAs), including Booking.com, as well as meta-search websites, including 52 Week Performance KAYAK. 130 The company generated $12.4B of gross profit in 2017 with a 39.4% EBITDA margin. Booking Holdings is a high return business with secular growth trends, the potential for improved margins, and a competent management team. 115 Investment Thesis – Three long-term trends pave the runway for growth. 100 – Travel bookings are shifting from offline to online. – Millennials increasingly desire to travel. 85 – A rising middle-class in Asia will add new global travel 01-Sep-17 18-Feb-18 07-Aug-18 customers. BKNG S&P 100 Index – Two strong competitive advantages and an emerging third. – As the leader, the company benefits from economies of Consumers & Healthcare scale. Andrei Florescu – Network effects between customers and listings derive an unmatched value proposition. [email protected] – To generate higher returns, the company is working to Ioulia Malamoud create a brand competitive advantage. [email protected] – Glenn Fogel (CEO) is intelligent and aligned with investors. Connor Steckly [email protected] The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to Bronwyn Ferris constitute specific legal, accounting, financial or tax advice for any individual. 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Jamie Bennett © Queen’s University 2018 [email protected] September 24, 2018 A Travel Industry Leader Table of Contents Travel Industry Landscape: Overview & Key Drivers 3 Travel Industry Landscape: How Consumers Buy 4 Company Overview: Booking Holdings 5 Company Overview: Brand Umbrella 6 Long Term Thinking: Brand Spending 7 Competitive Advantage: Industry-Leading Scale and Network Effects 8 The Google Threat: From Partner to Competitor 9 Management and their Compensation 10 Valuation 13 References 14 2 September 24, 2018 A Travel Industry Leader Travel Industry Landscape: Overview & Key Drivers The global travel market is valued at $1.3T USD, of revenue of $24B and resulting GMV of $185B based on which $540B (42%) is processed through various online an industry average take rate of 13%. This illustrates channels. The remaining $760B (58%) is facilitated the degree of fragmentation in the industry, as the through traditional channels- either in person or by three largest online players capture just 35% of online phone. Overall, the global market is highly fragmented, orders and 14% of the overall travel industry. The bulk with various hotel chains, airline companies, rental of remaining online orders are placed directly through agencies, and service brokers who have their own a given service provider’s platform. corporate platforms to manage transactions. The current market is in the mid stages of an online Online travel agencies like Booking.com provide adoption cycle, with consumer behavior gradually compelling value to consumers by enabling end to shifting from traditional mediums to more convenient end service and simplifying shopping around in a online channels. This conversion has been a powerful fragmented landscape. In a survey conducted by growth lever for online marketplaces that aggregate Credit Suisse, those using an OTA cited “ease of use” supply and provide consumers with a cross-platform, and “brand trust” as the top reasons for choosing the end to end shopping experience. The key competitors OTA interface. This is an important distinction- while in the travel industry are traditional agencies, online the overall industry is heavily price competitive and travel agencies (OTAs) and non-standard barriers to entry are low, OTAs benefit from a accommodation engines like Airbnb and HomeAway. marketplace network effect. Consumers want to shop where all their needs can be efficiently met, leading The largest online players are Booking Holdings, travel service providers to list on the largest OTAs, and Expedia, and TripAdvisor (Exhibit I), with combined the cycle continues. EXHIBIT I EXHIBIT II Revenue of the Big Three OTAs Size and Penetration by Geography $500 60% $375 45% 7% 52% $250 30% 41% $125 15% $0 0% Asia USA Europe LatAm Booking.com Expedia Trip Advisor Market Size (Bn) Online Market (Bn) % Online Source(s): Company Reports Source(s): Company Reports, Credit Suisse Estimates 3 September 24, 2018 A Travel Industry Leader Travel Industry Landscape: How Consumers Buy Travel consumers tend to follow a structured approach example, a ‘flights to Paris’ Google search will yield an to online travel. As shown in Exhibits III and IV each embedded Google Flights scheduling tool that directs stage of the buying process has grown more the user to the Google Flights website. Integration congested in recent years. Increased congestion in with the company’s search engine and Android each stage of the buying process is largely attributed operating system has allowed Google to successfully to high client acquisition costs and difficult penetrate this stage of the buying process. monetization of certain steps in the process. Consumers then compare their options to determine Consumers begin their search process by seeking which travel solution they choose. Specific criteria used inspiration online. Traditionally, Google has been the to evaluate alternatives vary between types of leader in this space. An example of how a user may customers. Trivago has historically been the primary seek inspiration on Google is by searching for family destination consumers would use for comparisons, vacations. however this has since changed, with most major online travel websites offering this service. The second step of the buying process is where consumers search their prospective destinations. The booking stage is where the transaction occurs, Google and TripAdvisor are the legacy leaders in this which makes it an appealing space to compete in. space. The search stage of the buying process is of Booking.com historically dominated this space, but high importance given its ability to direct users to the competition is building. online destination of where the transaction will take place. Google is pushing aggressively into this space Finally, the share stage is where travellers share their with their Google Flights and hotel search services. For experiences, which is more challenging to monetize. EXHIBIT III EXHIBIT IV 2013 – Little overlap in service offerings 2018 – Nearly perfect overlap in service offerings Inspiration Inspiration Facebook Facebook Google Google TripAdvisor Booking.com Facebook Facebook Trivago Share Google Search Share Google Google Search TripAdvisor TripAdvisor TripAdvisor TripAdvisor Booking.com Booking.com Trivago Trivago Google Google TripAdvisor TripAdvisor Booking.com Trivago Booking.com Booking.com Trivago Trivago Book Comparison Book Comparison Source(s): Mirai Source(s): Mirai 4 September 24, 2018 A Travel Industry Leader Company Overview: Booking Holdings Booking Holdings is the largest of the three big OTAs and overhead. Their only cost of revenue is for and operates under six brands which serve various Priceline.com merchant activities, where revenue is functional niches (see following page). Their principal recorded on a gross basis. The bulk of the remaining activities include facilitating flight, accommodation, costs are performance (variable) advertising ($4.1B) and car rental bookings through their online platform. and brand (fixed) advertising ($392M). During 2017, BKNG generated $2.3B in profit on $12.7B of revenue, Business Model an impressive 18% net income margin. Booking Holdings is a marketplace that generates BKNG’s merchant services allowed them to pioneer revenue in three ways: agency revenue, merchant opaque travel services like the “Name Your Own Price” revenue, and advertising revenue (see Exhibit V). option on Priceline.com. Opaque services allow BKNG Agency revenue is the lion’s share of their business, to sell anonymous rooms of guaranteed quality to the and is generated through a commission of ~13% on all consumer for a price below market value. This allows orders that flow through their platform. Merchant hotels to quickly fill unused rooms without damaging revenue is generated when Booking facilitates their brand or tripping minimum online pricing rules, payment activities directly with the end customer. and creates compelling value for price sensitive Advertising revenue is generated by sending referrals consumers who are willing to be adaptable within to