Other than the very large tech companies, Booking Holdings (formerly Priceline) appears to be one of the best-run internet companies in the world. With its global scale, the business is very good at balancing financial returns with growth in room nights.
Booking now operates in one of the more mature parts of the digital economy – online travel. Online travel accounts for over 40% of total global travel, while in the US this number is c. 47% of total travel. Booking is the largest global online player, although it isn’t the number-one player in either of the world’s largest travel markets – the US (Expedia) or China (Ctrip). The business is mostly an online agency for accommodation (in hotels, etc.).
As can be seen in the chart below, the growth rate in room nights at Bookings has begun to slow (to 13% YoY in 1Q18). This is due to two reasons 1) some maturity in the market; and 2) a conscious decision to get a better return on its advertising. As a result, the Group’s operating margin has improved slightly in recent quarters, following several years of declines.
We like the business – it is well run and has a leading market share. It does, however, have a structural weakness in that it relies on gate-keepers for much of its online traffic – i.e. traffic comes via search companies such as Google, or the travel meta-search companies like Trivago. Ultimately, it needs to build a direct business where people have a Booking app on their phones or tablets – and where people always equate travel with Booking. Although the company is trying to do this, it always faces the risk that the gate-keepers, like Google, will begin to aggressively pursue the travel market.
We are happy to maintain this investment and, although the online market may be maturing, the online market share of total travel still has room to grow. In addition, travel tends to grow at a higher rate than GDP. Online travel will, however, become more cyclical as it matures. The company’s PE multiple to December 2018 is 25x (EPS growth of say 15%, excluding the impact of tax changes in the US). The discounted cash flow (DCF) value of $3,000 reflects reasonable upside potential – assuming that the company is able to maintain double-digit revenue growth for the next few years.