Booking Holdings Analysis_Part 1

Booking’s Business

Booking is an online travel agency providing hotel and flight booking services for clients. Booking has a mature business model in a hundred-billion-dollar market, benefiting from the continuous growth of travel demand. Online booking services make travel more convenient and personalized for clients, which in turn, improves overall market growth. The online travel agency market is highly competitive, with many players participating. Most companies build their advantages through supplier expansion and personalized products. Booking is a leader in this market, operating four main booking platforms: Booking, Priceline, Agoda, and Kayak. Booking has two primary sources of income. The first is commissions from product suppliers, like hotels. The second is agency revenue from customers. Booking's main revenue comes from the EU market, which is currently affected by the war in Ukraine and the Middle East. Although management forecasts the impact on booking volume to be around 1%, investors should pay close attention to the escalation of the war and business updates from the company's next quarterly reports. Nevertheless, these challenges may present investors with a more attractive price point for investment.

Growth Ability

Booking has experienced high revenue and operating profit growth over the past 20 years, with both averages exceeding 20%. Growth began to slow down from 2014 but has maintained high double-digit growth. This suggests strong travel demand in the past years. Profit growth has matched the pace of revenue growth, indicating high-quality growth in past years. COVID-19 caused short-term harm to Booking's business, but recovery commenced in 2021 as backlog travel demand rebounded post-lockdown. Booking has returned to normal growth compared to the years before COVID-19.

High deferred revenue growth in the chart below suggests a continuous recovery of travel demand. Booking still has good growth potential for next year. However, as mentioned earlier, the travel business in Europe and the Middle East will be impacted by the escalation of the war. These areas are important for Booking's booking volume. I believe growth may be lower than double-digit growth in the first quarter of 2024.

Profitability

Booking has strong profitability, with an expanding gross margin and high operating margin. As Booking generates revenue from commissions and agency fees via the internet platform and counts no direct costs, operating profit, including the cost of doing business, is more suitable for reviewing its business profitability and operating results. Booking's operating margin was high and stable before COVID-19 but declined during those years due to the COVID-19 effect and high inflation and has not fully recovered.

Booking changed its capital allocation plan before COVID-19, including maintaining low CapEx in recent years to support high free cash flow and starting dividend distribution from 2023. This change in capital allocation indicates that Booking's business is becoming mature and that profit and returns are prioritized. Booking may alter its growth route and prepare for new technology applications and changes in client experience. These changes are normal for a large company but may have side effects on its growth rate and valuation.

Profit Quality

Booking has a high quality of net income because the ratio of operating cash flow to net income exceeds one most of the time, indicating strong cash generation from its profits.

Operating Efficiency

As Booking generates revenue from hotel commissions and agency fees, it has no direct costs or inventory. To describe operating efficiency, I use the operating expense to calculate payable days and reflect its business operating ability. The asset turnover days indicate high operating efficiency for Booking, which is a strong advantage considering its stable operating margin. Quality cash flow turnover can support its financial leverage and achieve a high return on equity capital. However, there are indications of risk, like the increasing days of receivables in the past year, which has a side effect on operating efficiency and capital returns but is largely offset by the increase in the occupancy period of supplier’s payables.

Capital and Shareholder Return

Due to the combination of financial leverage and high cash flow turnover with a stable operating margin, Booking’s capital return has maintained an upside of 20% and exceeds capital costs excluding the COVID-19 period. In terms of shareholder returns, after realizing a positive profit, Booking has used more capital to buy back its shares, realizing shareholder returns. Booking has had an average buyback yield of 1.83% over the past 24 years, which has increased to 4% in recent years. Booking began paying dividends in 2023, which can increase its long-term value for shareholders. This may be a compromise to the high-interest-rate environment, but I do not think it will significantly aid valuation, especially given the risk-free rate above 4.5%.

Asset Quality

Booking's key assets have high volatility, especially after the COVID-19 period, suggesting low quality of core assets. Receivables have increased significantly in recent years but have not added more pressure on cash flow given that payables have also increased. PP&E has increased, and intangibles have declined, indicating Booking has shifted its CapEx to in-house development and is not eager to grow its business through acquisitions.

Solvency

Booking has very high financial leverage, determined by the capital-intensive nature of its business operations. Booking has light assets, relying on high-technology platforms, a smooth booking experience, and high website traffic, which require significant capital investment in platform development and maintenance, supplier cooperation, and continuous marketing. Booking uses high debt to manage operating cash demands, supported by stable margins and high cash turnover.

Booking's debt-to-EBITDA ratio is below 4 in most years, and it has a high quick ratio. However, as I mentioned, Booking's receivables and turnover is worsening post-COVID-19, indicating a negative effect on its solvency if payables pressures arise. This is a low-probability risk due to Booking’s leading role in this market but still exists.

Valuation

Booking's valuation is fair but not attractive because both multiples are still slightly higher than their historical averages. A full valuation conclusion should be made after comparing it with its competitors.

Conclusion

Booking is a leader with approximately a 30% market share in the online travel agency market. The key advantage is that global travel demand is still strong and continuously growing, which can provide more growth space for Booking. AI technology can leverage the value of the massive client data accumulated by these platforms in past years, indicating the ability to improve personalized product offerings. These high-level catalysts give investors optimistic expectations for Booking’s future growth. For business operations, I believe Booking is excellent due to its good track record in revenue growth, profit quality, stable operating margin, and high asset turnover.

There are still some risks to which investors should pay attention, like the escalation of the war in the Middle East and Ukraine where important markets for Booking’s business may see declines in hotel booking volumes and revenue. Beyond that, the decline in operating margin and receivables turnover creates a side effect on its profitability if not recovered in the short term.

I will make a comparison with Booking’s main rivals in the next part to analyze its competitive advantages.