Travel can be hard, as anyone who has had a flight canceled recently can tell you.
Booking Holdings
makes investing in travel easy.
Yes, Booking Holdings (ticker: BKNG). Shares of the travel website have been the closest thing to a sure thing in the travel universe, outperforming airline stocks, hotels, and Expedia (EXPE) in recent years. Over the past three years, the stock has doubled the return of the S&P 500, with those gains having been driven by strength in the overall travel market and Booking’s ability to turn that into profits. Travel is getting trickier after the post-Covid boom, but Booking’s strengths, particularly in Europe, give it an advantage that should mean continued outperformance in the years ahead.
“Booking is more exposed to a structurally better market in Europe,” says Ramiz Chelat, a portfolio manager at
Vontobel Asset Management,
which owns the stock. “We tend to go for industry leaders with cleaner track records, and Booking stands out.”
Booking isn’t a little-known destination for investors. The stock has gained 50% in 2023, to a recent $3,040, driven by total bookings, which rose 15% to $39.7 billion in the second quarter. It’s fair to wonder if all the gains are already in the stock, particularly amid signs that travel could start to slow.
| Key Data | |
|---|---|
| Recent Price | $3,014.48 |
| YTD Change | 51% |
| Market Value | $107 billion |
| 2024E P/E | 17.8 |
| Base Dividend Yield | N/A |
E=estimate
Source: Bloomberg
Booking, though, is more than just a simple play on the travel market. The advantage it gets from Europe is what sets it apart from Expedia and other travel sites. U.S. hotels are largely chain-operated, and travelers are often better off booking through
Hilton Wordwide Holdings
(HLT),
Hyatt Hotels
(H),
Marriott International
(MAR), or others directly than through the travel aggregators.
That’s not the case in Europe, where Booking has the largest market share in a very fragmented business, according to Mordor Intelligence. Many hotels there are independently operated and have little choice but to use Booking. They also have higher margins—D.A. Davidson analyst Tom White estimates that Booking earns 15% commission on hotels—than air travel, where it earns low- to mid-single-digit rates. That mix helps make Booking more profitable than its peers.
Geography will help, too. While U.S. travel is slowing, Asia has particularly high growth. That’s largely because of China, where travel is still only 60% of what it was before Covid, something Melius Research’s Conor Cunningham calls “a further catalyst for performance” as it continues to recover. “[We] expect the stock to continue to work, as the company has [outsize] exposure to international markets, where recovery is still in the middle innings,” he writes.
Despite its success, Booking isn’t getting complacent. It’s betting on what it calls “connected travel,” providing everything from the flight and the hotel to the car that gets travelers to and from the airport. It’s also using artificial intelligence to make it easier for customers to find what they want. In the long term, these efforts will boost company profits by keeping consumers coming to what is increasingly an all-in-one website.
“You’re adding a new revenue stream that’s adding profit dollars,” says Cowen analyst Kevin Kopelman. “More importantly, it’s supporting your overall package so it’s going to help drive hotel growth due to cross-selling and packages.”
The proof is in the financial results. Analysts forecast sales to grow at about 9.5% annually over the next three years to about $27.7 billion in 2026, according to FactSet, slightly slower than total bookings growth. Despite that, analysts expect operating margin to rise to just over 32% in 2026 from 30.9% this year, as sales growth outpaces increases in expenses such as marketing and salaries. Even without much operating margin expansion—increasing the amount it pays Google to drive traffic to its site is one possible headwind—net income should grow at roughly 13% annually.
The real driver of the stock, however, will be its free cash flow, which should top $7 billion next year. That would be roughly equal to earnings before interest, tax, and noncash expenses, because the company is keeping its capital expenditures low. And much of that cash will go to buying back stock—the company signaled on its second-quarter earnings call that it still has $19 billion authorized to buy back shares, which it plans to use over the next 3.5 years.
Buybacks have been a big part of Booking’s strategy—this year, it has reduced its share count from 37.9 million to 35.7 million through the end of July—and Evercore analyst Mark Mahaney says the company should be able to achieve high-teens earnings-per-share growth because of coming repurchases. Nor does the stock, at about 18 times 2024 earnings estimates of $169, look all that expensive. It’s roughly equal to the S&P 500’s valuation, yet Booking grows earnings at almost twice the rate of the index.
“I like the stock because I think it’s got good earnings growth,” says Mahaney, who has a $4,300 price target, up 41% from Wednesday’s close.
That’s a trip we look forward to taking.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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