Booking Holdings: Massive Share Buybacks Inbound (NASDAQ:BKNG)

Introduction

Airbnb, Inc. (ABNB) has been the new hot stock in the traveling industry for the last couple of years. The company is a true industry disruptor, with its platform focused on hosting, offering many different sorts of stays in the most abandoned or special locations. Airbnb offers a whole new experience to travelers and looks poised for impressive growth over the next decade as this type of traveling still looks like it is in its early days.

Yet, with Airbnb taking away all the attention, it sometimes seems like people are forgetting the true industry giant in Booking Holdings Inc. (NASDAQ:BKNG). This one is offering a similar opportunity to get exposure to the lucrative traveling industry, with a strong growth outlook, according to analysts, while having a much cheaper valuation compared to Airbnb. Booking has a much better international spread and is only behind Airbnb on the North American content based on market share. And while I am also very enthusiastic about Airbnb and its prospects, I feel like Booking Holdings might offer the better investment opportunity at this point, offering better potential returns.

If you have ever planned a vacation or a trip away from home, there is a big chance that you used, or at least checked, Booking.com as you looked for hotels or other forms of stays. Booking Holdings Inc. is the largest online travel conglomerate by both volume and revenue, and it has been for many years now. The company operates across 200 countries and has over 20,000 employees operating a platform available in over 40 languages. Besides owning flagship website Booking.com, Booking holdings also operates websites such as Priceline.com, Agoda.com, Kayak.com, Cheapflights, Rentalcars.com, and Momondo. The company is a travel behemoth and has a market share of over 38% in online booking apps worldwide, with its main competitor being Airbnb, as shown below. Also, Booking.com is responsible for over 25% of all hotel bookings worldwide.

Yet, the company’s position is not as strong as it has been, and when we look at online bookings in the U.S., the picture is less positive, with Booking Holdings only holding a 19.5% market share. This is primarily due to significant competition from industry disruptor Airbnb, which has now overtaken Booking in the U.S. with a market share of over 21%.

In addition to serious competition, Booking Holdings saw a steep drop in revenues as a result of the covid-19 pandemic during 2020 and 2021. With pretty much the whole Western world in lockdowns, demand for travel accommodation fell to decade lows and, therefore, also low demand for the services offered by Booking Holdings. Yet, the company quickly recovered after these dismal years and recently reported revenue of $17 billion for FY22, overtaking the $15 billion in revenue reported for FY19 – the last covid-free year.

With the travel industry now nearly back to, or over, its 2019 levels, and Booking Holdings back to reporting record revenues, growth is also expected to return to more normalized levels. Still, this does not need to be bad news, as the travel accommodation industry is expected to keep growing at double digits over the next decade, while the total travel and tourism industry is also expected to keep growing going forward. With Booking still holding a significant market share globally and continuously expanding into new business segments such as experiences, it looks well-positioned for continued growth. Yet, with it acting in a highly competitive industry, it will be important for Booking to keep distinguishing itself from the competition.

That brings me to the big question: is Booking Holdings a good long-term buy at current prices? To determine this, I will dive into its latest earnings release, financials, valuation, outlook, and discuss growth drivers.

Let’s get to it!

FY22 Review and growth drivers

Booking Holdings (which I will refer to as Booking) reported its latest financial results for 4Q22 and FY22 back on February 23, 2023. A first look at the headline numbers shows a very strong performance with the company outperforming the analyst estimates. EPS came in at $24.74, beating the consensus by $2.66 and revenue of $4.05 billion managed to beat the consensus by $150 million. This represented an increase of 21% vs the same quarter in 2019 as the underlying accommodation take rate remained flat. This strong performance was due to an increase in room night growth of 10% from 2019 (used as a comparison as this was the last covid-free year) which was better than the 8% growth witnessed in the third quarter.

This improvement was driven by growth in both the U.S. and Asia. Room nights booked in the U.S. were up by more than 35% compared to 2019, for the fourth quarter in a row. Europe and Asia grew by mid-single digits and the rest of the world was up by 110%. Growth in Asia might not look over convincing, but this was the first quarter of positive growth since 2019 for this region as the fourth quarter saw the first slight improvement from covid-19 measures in China which is a huge traveling market.

To point out a few more important metrics for 4Q22, gross bookings increased by 32% compared to 2019 and the number of airline tickets booked in the platform increased by only 2.9%, yet this was up 61% compared to 2021 as Booking continues to expand its flight tickets offering through the platform.

Now, with the reporting of the fourth quarter, Booking also discussed its FY22 results, which are much more meaningful with quite a bit of volatility in month-to-month trends, so let’s shift our focus to this. Despite the tough economic circumstances over 2022, Booking reported a record high 900 million room nights booked on its platforms which was 6% higher compared to 2019, and a massive 52% increase from 2021, although this is somewhat meaningless with covid restrictions still very much ongoing in 2021. Gross bookings of $121 billion increased by 26% from 2019 levels and a massive 36% on constant currency.

With Booking deriving a lot of its revenues from international markets, the strengthening of the dollar during 2022 has had quite some impact on revenues, which explains the large difference mentioned above. Still, despite these headwinds, Booking reported a very solid 2022 as it managed to report very impressive growth rates vs. 2019, which shows that the company has fully recovered and is reaching new all-time highs across several metrics. It is achieving this despite the fact that not all regions were restriction-free during the full year, with Asia only opening up by the second half of the year. This makes the performance even more impressive and continues to offer tailwinds for the next couple of quarters as well.

Revenue also reached an all-time high of $17.1 billion and was up 13% from 2019. This shows revenue growth was slower compared to gross booking growth, and this is reflected in revenue as a percentage of gross booking which was down from 2019 levels of 15.6% to 14.1% in 2022. According to management, this was the result of a 1% impact from bad timing, a 0.4% impact from a slow recovery of advertisement income, and a 0.3% impact from a negative mix in flights. All in all, this should not be a long-term trend and the percentage of revenue from gross bookings should return to 2019 levels, and over, over the next couple of quarters.

With the increase in revenue, Booking also improved its profitability and reported an EBITDA of $5.3 billion, up 6% compared to 2019 on constant currency, yet down 4% in dollars. The EBITDA margin came in at 31% and was up 4% from 2021. This all resulted in a net income of $4 billion and EPS of $99.83, which was up 118% YoY.

In addition to reporting very impressive financial results, Booking also made great strides in its strategic priorities which it laid out 2 years ago. One of these is increasing the payments made on the Booking.com platform as the shift from agent to merchant drives important benefits for all parties involved. This is what CEO Glenn Vogel said about this during the earnings call:

For our supplier partners, offering a payment solution adds value in several key ways, including providing access to additional traveler demand by enabling alternative payment methods, reducing cancellations, decreasing operational workloads and enabling fraud protection. For our travelers, Booking.com’s platform allows many consumers to pay how they want to pay and we believe ultimately helps deliver a more seamless and frictionless booking experience.

Experience and functionality are key to delivering the best service to both customers and supplier partners. Both factors can drive customer loyalty. If you like a platform and it works, you are much less likely to switch to another one, so this should help Booking maintain its incredible moat and large user and supplier base. I am, therefore, pleased to see that Booking is focusing on these matters, and even more that it looks like it’s working. In the fourth quarter, Booking processed 42% of Booking.com’s gross bookings, and management was very pleased with this progress.

Another strategic priority of management, focused on increasing the customer experience to improve loyalty, was building out connected trip capabilities. What this means is that Booking Holdings aims to improve the entire booking experience by making it easier, more enjoyable, more personal, and delivering better value. Booking aims to do this by focusing on bringing together and connecting all aspects of your desired traveling experience by expanding its offering of other travel verticals other than accommodations. Therefore, the company has been heavily focused on integrating flight opportunities and it released Priceline Experiences to enable customers to quickly search and book more than 80,000 activities in over 100 countries.

Ideally, Booking Holdings Inc. wants to offer a platform to its customers that allow them to arrange every aspect of their trip on a single platform to increase customer engagement and loyalty to the platform over time. And indeed, speaking from my personal experience, a more seamless, flexible, and complete Booking experience seems like the best way to achieve higher customer engagement. Everyone who has ever arranged a trip or vacation must have wished at some point that you could just do it all through a single app, instead of having to switch between several ones every second and make it all work together.

All in all, I believe that a focus on a single platform offering all travel aspects can be a great loyalty driver and offer protection of the moat Booking Holdings currently has in the traveling industry. I think management is on the right path here and it is making progress toward this. The flight offering through the Booking.com platform is now available in over 50 countries and allows travelers to book another important travel component through this platform. And in addition to delivering more functionality to existing users, it is also attracting new users to the platform Booking stated during the earnings call that 20% of all flight bookers are new to the platform, illustrating that it is also a way to increase its user base.

Another important way to improve customer engagement and user experience and functionality is the mobile app, which management sees as the center of its connected trip vision. Of all nights booked in the fourth quarter, 45% were made through the online apps, which is in line with what we have seen for FY22 and 13% higher compared to 2019. Worldwide, the Booking.com app remains the number one in the number of downloads and according to a leading third-party research firm, Booking also moved to the number one spot in the U.S. last quarter.

That brings me to the final strategic priority to be discussed, which is a focus on strengthening its position in the U.S., where it is fighting against Airbnb as I already pointed out in the introduction. And while it is working hard on improving its strength here, management acknowledges that there is still much more work ahead. Still, growth for this region was strong last year as room night bookings grew by 30%, while gross bookings grew by 60% vs 2019. Based on these metrics, Booking has meaningfully grown its U.S. business compared to 2019, as it fights to take away market share from Airbnb.

The following statement was made during the recent earnings call:

And we believe that our growth rate has outpaced the recovery in the broader market for U.S. accommodations, which means we believe we gained market share.

Further increasing its market share in the U.S. could be an excellent driver of further financial growth, but does not seem like a game changer in the near term while also being very challenging and uncertain.

A more obvious growth driver for Booking seems to be the general growth of the travel accommodations industry. This one is expected to grow at an 11.3% CAGR until 2031 to reach a market size of close to $2 trillion. The traveling industry is massive and quite lucrative. It is therefore crucial for Booking to maintain its market share which explains the importance of all of management’s actions discussed above. Also, the re-opening of China will be an additional growth driver for Booking Holdings as they have good exposure here. Overall, as one of the leading travel accommodation platforms, the strong double-digit predicted growth will be a massive growth driver for Booking as the company earns the largest part of its revenues within this industry.

Balance Sheet

Another growth driver and reason to possibly invest in Booking is the strength of its balance sheet and incredible capital return program. With Booking remaining very positive about the long-term outlook for the travel industry and its strong balance sheet, it was able to return $6.5 billion to shareholders in 2022 by repurchasing its own shares (Booking does not offer a dividend). This means that Booking was able to lower its total share count by a massive 8% in a single year, and 22% over the last 5 years. This is very impressive, and management has already said that returning cash to shareholders remains a priority.

That management is very much focused on its shareholders is also proven by the following statement from the earnings call:

We view SBC expense as a very real cost of doing business across every stakeholder should fully count when evaluating the performance and returns of our business or any business. If anything, we view SBC dollars even more valuable than cash dollars because of our long-term expectation that dollars worth of stock to-date will be worth more in the future. It’s the same expectation that serves as the rationale for pursuing our share repurchase program, a program that has meaningfully reduced our share count over time has not just served to offset dilution from SBC.

Simply offsetting dilution does not represent a return of capital to shareholders, but actually represents a cash drain on our business that does not get counted in many companies’ pro forma reporting of profits. In 2022, our stock-based compensation resulted in less than 0.7% of shareholder dilution. And during the last 5 years, it resulted in less than 3% of cumulative dilution. As I mentioned, during the same period, we reduced total share count by a net 22%, inclusive of the shares that were added as a result of our stock-based compensation activities. Our future practices will continue to be guided by the same two philosophical approaches that guide us decades, namely, number one, the stock-based compensation counts; and two, that our stock repurchases, first and foremost, are meant – are actively meant to return capital to shareholders in the form of share count reductions.

I view these as incredibly impressive statements by management and showing just how aware they are of the well-being of their investors. In a time where there is much discussion about the stock-based compensation of technology companies like Salesforce (CRM) and The Trade Desk (TTD), this statement by Booking Holdings management is great to see for a change. This is a massive green flag for investors and such a focus on returning cash to shareholders, without diluting them, should be a great value driver for investors. Impressive!

And the good news does not end there, as management expects its annual total return of capital to shareholders to be at least equal to its free cash flow over the next few years. And considering the great projected growth rates which I will discuss in the next segment, this sounds very promising.

Booking Holdings Inc. currently still has $3.9 billion remaining under its current share repurchase program, which it announced in the second quarter of 2019. But with its financial results, Booking also announced a new share repurchase authorization of $20 billion that will begin once the previous one is fully completed. This means that as long as the travel industry continues to recover and grow from here as projected, investors should expect a total of $24 billion to be spent on share repurchases over the next 4 years, almost fully covered by free cash flow. This means that the company plans on retiring over 20% of its outstanding shares over this 4-year period which is, once again, very impressive.

Allowing this is its strong balance sheet, which held a total cash position of $15.2 billion by the end of FY22. This was up from $11.8 billion with which the company ended the third quarter, despite repurchasing $2.3 billion of its own shares and the payment of $780 million of debt. So how did they still manage to increase the cash position by a staggering $3.4 billion?

This is driven primarily by the $3.6 billion bond offering we completed in Q4, the $2.1 billion of free cash flow generated in the quarter, and about $600 million in proceeds from the sale leaseback transaction I mentioned previously

While this means the company had some favorable one-offs, the share buyback was still almost completely covered by free cash flow, which is great to see. For FY22 Booking generated a very solid $6.2 billion in free cash flow, a 36% increase from 2019. Also, this shows that the FY22 buybacks were almost fully covered by free cash flow. In addition to a great cash position, Booking held about $13 billion of debt on the balance sheet which is covered by its cash position. In addition to this, the company started to sell down on its investment in Meituan and completed this in February. The total proceeds of the sale are $1.7 billion, a 250% increase from its initial investment. After taxes, the remaining $1.4 billion will be used to strengthen the balance sheet.

Outlook & Valuation

Besides delivering very strong results for its FY22, Booking Holdings Inc. also holds a positive view of the future as growth remains, driven by a further recovery in Asia and continued strengthening of the travel industry. The only real threat to this outlook seems to be a serious recession, but more on this later. That the enthusiasm by management is justified is reflected in the January results from Booking, which increased by 26% compared to 2019, or up 60% from January last year. This is what was said during the earnings call:

We are very encouraged by the continued strength and resiliency of travel demand last year and into the new year which speaks to consumers’ strong desire to travel.

The company saw a record high number of nights booked in January as this came in at 95 million. This was 10 million more than the previous monthly record from May last year, illustrating the strength of the platform entering 2023. This growth for the first month seemed to be driven by all regions apart from the U.S. Asia, in particular, was up 20%, seeing much of an improvement from last quarter. Of course, one should keep in mind that monthly numbers are a rough indication of the months ahead as these can be easily influenced by a number of factors. Still, a 74% increase in gross bookings is nothing to be negative about.

All in all, management expects to report 30% growth YoY for the first quarter, or 20% from the first quarter of 2019. Revenue as a percentage of gross bookings is expected to be 10.3% which is 40 basis points higher compared to 2019. Expenses across the board are also expected to be a bit higher compared to last quarter but should be outpaced by revenue growth. This results in a projected 1Q23 EBITDA of $600 million, up 93% YoY. We should of course keep in mind that 1Q22 was still impacted by Omicron.

For the full year, management remains careful. The year so far is looking very good, but they are expecting quite a bit of volatility in the numbers. Using a conservative approach, considering the more difficult comparisons and moderation in growth, Booking expects to report gross booking growth in the low-teens percentages YoY. Revenue as a percentage of gross bookings is expected to increase by 0.5% and should drive slightly higher revenue growth. And while fixed expenses are expected to grow by 20% for FY23, slowing down from there, management also expects record levels of EBITDA as margins should expand by a couple of percentages. This should most likely result in EPS growth in the high-teens percentages with revenue growth of low to mid-teens. This shows that Booking is still projecting solid growth ahead.

So, how is this reflected in the analyst estimates for both the first quarter and full year? For the first quarter, analysts are guiding for revenue of $3.77 billion, up close to 40% YoY. Considering that the total nights booked increased by 60% for January and this month last year was still impacted by Omicron, this looks about right. For EPS, this results in $10.79 which would represent a 177% increase YoY.

For FY23, analyst project revenue of $20 billion, up close to 17% YoY. This looks to be a somewhat higher outlook than given by management, but this one seemed to be overly conservative. EPS growth is expected to be 30% and result in an EPS of $130. Again, this looks to be somewhat higher than guided by management but looks fair considering all circumstances. I believe current analyst projections look very fair right now, but we can only really tell when Booking reports its second quarter results and needs to start lapping tougher comparable quarters.

For the period until 2026, analysts project Booking to keep reporting strong growth rates as the travel industry is fully recovering with all regions reopening and the industry returning to its historical growth, together with economic headwinds disappearing which should allow for consumers to start spending more easily again. In addition to this, Booking is doing all the right things to increase the user base which should be an additional driver of revenue. As a result, analysts project revenue growth of low double digits to high single digits in combination with EPS growth of 20% for FY24, moderating to 9% by 2026. With management enthusiastically returning cash to shareholders through share repurchases and solid economic growth, investors look well positioned for decent returns, and growth rates by analysts look very reasonable.

Based on the current, reasonable, analyst non-GAAP EPS expectations, Booking is valued at a forward P/E of 20x. This is 57% below its 5-year average valuation of 47x. Of course, over the last several years profitability was heavily impacted by covid which caused an elevated and unreasonable P/E ratio. Still, I believe that based on the growth projections, moat, and shareholder-friendly approach of management, Booking deserves to be valued at a P/E of closer to 23x.

Based on current non-GAAP EPS projections for FY23 and a P/E of 23x, I calculate a target price for Booking Holdings Inc. of $2990, or 14.4% upside from a current share price of around $2600.

For comparison, 34 Wall Street analysts currently have an average price target of $2736, combined with a buy rating on the shares. This price target leaves approximately a 4.5% upside.

Risks

While Booking Holdings Inc. is a really impressive company, an investment in the company is not risk-free, as illustrated over the last couple of years, when revenues fell to worrying levels. Luckily, the company is relatively asset-light and does not own any properties itself, making it a lot less risky compared to many accommodation peers.

Yet, this does open the company up to the risk of losing properties, supplier partners, and offerings to place on its platforms. With the company not owning any of the properties, hotels, and accommodations on its website, it does depend on people listing their accommodations on the platform. The platforms owned by Booking Holdings have a very broad reach and user base and as a result, many hotels and suppliers depend on the platform and have a long-standing relationship with the company. I, therefore, do not perceive this risk to be overly large or a short-term threat. Yet, this is something to keep an eye on when you own the shares.

And whereas it makes Booking dependent on third-party accommodations, it does protect it somewhat from a potential recession as it won’t be stuck with high maintenance costs. Of course, if a severe recession would hit and people were to lose their jobs, resulting in a general increase in unemployment, this would impact the amount people are willing or able to spend on vacations or trips. Therefore, Booking is sensitive to economic prosperity and a potential downturn. Over 2022, the recovery has been stronger than the economic headwinds with saving accounts still at their highest level in decades. 2023 is not expected to be different, but in future economic downturns, Booking could take another temporary hit. Of course, these impacts tend to be only temporary and should not break the overall growth trend that will benefit Booking Holdings.

Finally, there is the risk of further market share losses to competitors like Airbnb. Management is very well aware of this risk which is the reason why they are investing heavy sums in making their offering stickier and more complete. Still, new competitors could arise that are better able to play into the latest consumer preferences or have a better overall offering.

Conclusion

Booking Holdings Inc. was hit very hard by the covid-19 pandemic but has now managed to fully recover and return to growth. Its latest quarter proved this with very strong growth rates driven by renewed growth from the Asian continent. Booking continues to be the travel accommodations industry leader with its excellent broad exposure and impressive market share. The company is pulling several levers to maintain this position, while also expanding its user base by entering new markets.

With this company being led by an excellent management team and operating a very shareholder-friendly strategy, I have little to no doubts about the future of this company. Of course, no investment is risk-free but overall, the risk seems to be minimized for an investment in Booking Holdings. Considering the massive amounts of buybacks that are planned for the next 4 years, strong market position, and growth projections for Booking, I calculate a target price for Booking Holdings Inc. stock of $2990. This offers investors about 14.5% upside from its current price levels of around $2600, offering enough downside protection.

Therefore, I rate Booking Holdings Inc. stock a buy with a 12-month price target of $2990. Booking Holdings Inc. offers decent upside potential, a shareholder-friendly management that does not dilute its shareholders, and exposure to the travel industry through one of the largest travel conglomerates.