Description

Description

Booking Holdings owns Booking.com, Priceline, Agoda, Kayak, and OpenTable.  This write-up will focus on the hotel OTA business (Booking, Priceline, and Agoda) since this business drives an overwhelming percentage of overall profitability.

Business overview

Because it is a hotel marketplace, Booking has very large hotel consumer traffic.  It gets paid when consumers book hotels through its site.  The consolidated company had 673 million room night reservations and $81 bn of total bookings in 2017, with a trend to do $92 billion in bookings in 2018 (~13% y/y growth).  The average take rate is 14% and has been fairly stable over the last few years. The rate is lower for large chains (i.e. Hilton), and higher for small hotels (take rates for some hotels can be 30+%).  Hotels are forced to pay these rates because the percentage of travelers who find hotels online is significant, and they otherwise find it extremely hard to gain transient travelers.  The hotel segment is much more attractive than the air travel segment because of the higher take rates, higher supply fragmentation, and lower digital sophistication on the part of hotels (vs. airlines).

The business is very good; it 2017 Booking earned $4.5 bn in operating income with just $1.6 bn of non-cash current assets, $0.5 bn of PP&E, and accounts payable and accrued expenses of $1.8 bn.

There are very high barriers to entry.  To enter into it, you would have to sign up a lot of hotels before having any significant volume to offer them.  Then you would have to spend enormous amounts optimizing the website.  These two items are not as easy as they seem which is demonstrated by Expedia’s heavy investment in supply to catch up to Booking.  Finally, the new competitor would have to be able to pay more for traffic than Booking and Expedia.  Given that OTAs make fairly little money on the traffic that they pay for (the profits are concentrated in the travelers who do not go through Google paid search or Trivago/other metasearch), any new OTA would be incurring massive losses to acquire traffic.    

Thesis

I think Booking will grow hotel bookings at approximately an 8% rate through 2024. Per Phocuswright the accepted data source in the industry, hotel online penetration in 2018 in the US is ~43%, 39% in EU, 37% in APAC, 29% in LATAM, and 36% in ME for a global average of 39%. 

Phocuswright’s estimates are for the online bookings of hotels to go from $201 bn in 2018 to $254 bn in 2021 (or an ~8% CAGR) driven by online penetration increasing from 39% to 42% (likely conservative), and the hotel market growing at 5% which is reasonable given travel grows faster than nominal GDP.  

The vacation rental / sharing economy market will grow from about $160 bn in 2018 to $230 bn in 2021 (~13% CAGR) which will help Booking’s growth rate.  While Booking’s main business is hotels, it also has a very sizeable alternative accommodations business with 5.5 million reported listings in homes, apartments, and other unique places to stay.

I assume Booking’s margins will stay flat (EBITDA of approximately 40% of revenues) which may be conservative because over time Booking should get increasing leverage on its non-marketing costs. I assume that from 2019 to 2024, Booking will repurchase a combined $22 bn worth of shares – which averages out to $3.6 bn per year. While this may seem aggressive, I’d note that Booking currently has $8.6 bn remaining under its share repurchase authorization and they intend to complete it within 2-3 years. As a result of this, I assume 41 mm shares outstanding in 2024 (assuming an escalating per-share price over time).  My assumption is that in 2024, EPS will be $167, meaning at today’s share price Booking is trading at 11x that number.  While this doesn’t deliver a huge IRR (I estimate low teens), I think it is still an attractive IRR for a very high quality business.

Other points

I think in a downturn Booking will have more earnings resilience than companies like Facebook or Google because a significant percentage of their spend (performance marketing) will quickly decrease, whereas other tech companies are likely to keep growing expenses in a downturn. Performance advertising represented $4 bn of spend in 2017 vs. total opex of $8 bn so it is demonstrably the most significant expense.  Furthermore, as growth slows in the future, there should be marketing leverage because the ratio of new customers to total customers will decrease.  

Management: I think Booking has had great management. This is demonstrated by the original acquisition of Booking, focus on operations rather than acquisition (vs. Expedia), significant partnerships in China (with Ctrip, Meituan, and Didi) which are important given the high percentage of the growth coming from that market, and long term strong execution in a field where other well positioned companies like TripAdvisor and Expedia have not done nearly as well.

Google: I don’t think it makes sense for them to become an OTA because they already make most of the economics for the traffic that flows through them.  Moreover, they would have to build out enormous amounts of content to get users to book a given hotel, handle customer service calls (where do I find Google’s number?), probably hire >10k employees (Booking has 24k), and as a result initially make less money than they currently do.

Disclaimer: This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation.  This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.

Catalyst

Continued growth by the company.