Booking Holdings: Quality Business Facing Cyclical Headwinds (NASDAQ:BKNG)

Booking Holdings (NASDAQ:BKNG) growth momentum is under pressure, as the travel industry is set to navigate a challenging consumer backdrop. But despite macroeconomic headwinds and a potentially slowing travel market, which has been highlighted by all major travel companies, Booking remains strategically well-positioned to sustain growth through various commercial levers, in my view. Specifically, I highlight that Booking.com is emphasizing its mobile app for direct booking and maintaining flexibility and operating efficiency through its variable cost structure. On valuation, I see BKNG as slightly overvalued, but still investable: Based on a residual earnings model, I calculate a fair implied share price of about $3,045. However, a 15-20% premium to fundamental value is nothing that long-term focused investors should worry about, in my view. “Hold”.

To give some perspective on share price momentum, Booking stock has underperformed compared to the broader market this year. While BKNG shares are up about 5%, the S&P 500 has climbed approximately 13%. Despite this, BKNG has still outpaced its peer Airbnb (ABNB), with ABNB shares dropping by as much as 15% YTD.

Mixed Q2, But Overall Better Than Expected

Booking Holdings reported its Q2 2024 financial results on August 1st, delivering a mixed performance with revenue beat but weaker-than-expected guidance. During the period from April through June, the company posted revenues of $5.86 billion, up 7.3% YoY, which was 2% ahead of consensus estimates. Notably, the strong topline was supported by robust growth in Room nights, which expanded by 7% YoY, exceeding the Street’s projection of 6% and the company’s prior guidance range of 4-6%. Gross bookings amounted to $41.4 billion, reflecting a 4.3% YoY increase. Adjusted EBITDA rose by 6.6% YoY to $1.89 billion (42% margin).

However, Booking’s Q3 guidance was notably below expectations across key metrics: bookings growth was guided at 2-4% YoY versus the Street’s 7%, revenue growth at 2-4% YoY compared to the expected 6.6%, and adjusted EBITDA in the range of $3.25-$3.35 billion versus consensus of $3.57 billion (all consensus data according to Refinitiv at the time of reporting). The company attributed the weaker outlook to lower flight prices, a tighter booking window, and a mild moderation in European travel demand. Still, despite these headwinds, management maintained a largely unchanged outlook for FY24, with slightly increased revenue and EBITDA growth expectations.

Booking.com’s profits are directly flowing to shareholders, which I highlight as a major positive argument for buying BKNG shares. Indeed, Booking.com repurchased $1.9 billion worth of shares in the second quarter of 2024 and $3.5 billion YTD. This aggressive buyback strategy has reduced the share count by 7.7% YoY, enhancing earnings per share and shareholder value. Moreover, management has voiced commitment to returning $24 billion in capital to shareholders over the next four years, which suggests a continuation of an aggressive buyback strategy, and the company’s confidence in its long-term prospects.

Strategy To Drive Upside

Despite concerns over a potential slowdown in the travel market, particularly in Europe, Booking has managed to stabilize its growth rates. Indeed, on a higher level perspective beyond short-term headwinds, Booking’s growth trajectory has been underpinned by strategic decisions with focus on operating efficiency, and technology. Specifically, I highlight 3 key trends: Firstly, Booking is laser-focused on operational efficiency. Notably, Booking managed to achieve 160 basis points of margin expansion in the first half of 2024. Additionally, management’s shift towards social media marketing, which offers a better return on investment, indicates a strategic move to enhance marketing efficiency​ and may drive some EPS upside. Secondly, Booking is increasing mobile app penetration: As of Q2, more than half of all room nights booked on Booking.com are now completed via its mobile app. This increase in mobile app usage is significant because it typically leads to lower acquisition costs, higher margins, and greater customer loyalty. The growing share of mobile bookings aligns with the company’s strategy to drive more direct traffic and reduce reliance on paid marketing channels​. Thirdly, Booking is making substantial investments in artificial intelligence and machine learning technologies to enhance its customer service, personalization, and marketing efforts. These investments are intended to reduce costs, improve customer satisfaction, and drive more direct bookings, which could lead to significant long-term benefits in terms of profitability and competitive differentiation​.

Valuation Update: Set TP At $3,045 Per Share

For Booking.com, I recommend applying the residual earnings valuation method, which I find particularly suitable for valuing established companies, in mature industries like travel. That said, I have based my valuation on the consensus analyst forecasts for EPS up to 2026, using a cost of equity of 9.5% and a terminal growth rate of approximately 3.5%. According to these assumptions, my valuation indicates a fair share price of $3,045, suggesting that Booking.com is somewhat overvalued – but nothing to be concerned about, in my view.

For investors looking to consider rates from an alternative perspective, I’ve included a sensitivity analysis that evaluates different combinations of the cost of equity and terminal value growth rates. In this analysis, red cells highlight scenarios where Booking.com appears overvalued, while green cells indicate cases where the stock is undervalued compared to its current market price.

Key Risks To Watch

While Booking’s long-term outlook is favorable, several risks could impact its growth prospects: Firstly, an economic slowdown or recession could reduce discretionary travel spending, directly affecting Booking’s business momentum. However, the company’s diversified revenue streams, including non-leisure travel and alternative accommodations, may help mitigate some of the downside risks​. Secondly, I point out that the online travel agency market remains fiercely competitive, with companies like Expedia and Airbnb posing substantial threats to Booking’s market share. Competition from these players, coupled with potential shifts in consumer behavior toward direct bookings with hotels or alternative accommodations, could exert pressure on Booking’s pricing power and margins.

Investor Takeaway

Booking has demonstrated resilient commercial momentum, marked by steady growth in bookings, revenue, and profitability despite facing several macroeconomic and industry-specific challenges. As of 2024, the company has maintained an 8% growth rate in bookings and revenue, with an impressive 15% annual growth in earnings per share. Meanwhile, strategic decisions such as increasing investments in social media marketing, emphasizing its mobile app for direct bookings, and maintaining flexibility through its variable cost structure are driving long-term competitive strength and EPS upside. Regarding valuation, I view BKNG as somewhat overvalued: Using a residual earnings model, I estimate a fair share price to be around $3,045. However, a premium of 15-20% above this fundamental value should not be a concern for long-term investors. Therefore, I maintain a “Hold” rating.