VALUATION HIGHLIGHTS

1. Merchant Bookings constitute 54% of the Trefis price estimate for Booking Holdings Inc.'s stock.
2. Agency constitutes 42% of the Trefis price estimate for Booking Holdings Inc.'s stock.

WHAT HAS CHANGED?

1. Booking Holdings Surpasses Q2 2023 Estimates

The online travel agency's revenues grew 27% year-over-year (y-o-y) to $5.5 billion, driven by a 15% y-o-y increase in gross bookings to $39.7 billion. Room nights booked increased 9% from the prior-year quarter, rental car days were up 24% y-o-y, and airline tickets booked jumped 53% y-o-y in Q2. Further, BKNG's adjusted EBITDA was up 64% y-o-y to $1.8 billion. Also, its earnings per share came in at $34.89 compared to $21.07 in Q2 2022.

Note: Booking Holdings FY'22 ended on December 31, 2022. Q2 FY'23 refers to the quarter that ended on June 30, 2023.

2. Looking Ahead

Compared to 2019, BKNG expects future room night growth in 2023 to be in the mid-teens, assuming some moderation from growth from the second quarter in July when room nights were helped by better-than-expected bookings. For the full-year 2023, the company expects its adjusted EBITDA margin to expand by a couple of percentage points versus 2022.

3. Uncertainties For the Travel Industry Continue

While consumers are certainly feeling the proverbial itch to travel, many headwinds could easily start to blow again. There are still uncertainties in the form of the Russian invasion of Ukraine, Israel-Hamas geo-political tension, rising inflation across the globe, supply chain shortages, potential recession, and ongoing challenges from any new Covid-19 variants.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Agency Bookings

Agency Gross Bookings: We currently forecast Booking Holdings' Agency gross bookings to increase from $67.4 billion in 2022 to ~116 billion by the end of our forecast period. There could be around a 5% downside to the Trefis price estimate if the gross booking were to grow to $100 billion over our forecast horizon.

Take Rate on Agency Bookings: We currently forecast the take rate (revenue as a percentage of the gross booking) to increase from 13.4% in 2022 to ~14% by the end of the forecast period. There could be a 5% downside if the take rate remains at around the current level during our forecast period.

BUSINESS SUMMARY

Booking Holdings is the largest online travel company in the world (in terms of gross bookings). It provides its customers with a broad range of travel services, which include bookings for hotel stays, airline tickets, car rentals, restaurant reservations, cruises, and vacation packages via its online travel portals: priceline.com, booking.com, agoda.com, rentalcars.com, opentable.com, breezenet.com, and lowestfares.com. Its websites connect travelers with suppliers of different travel products such as hotels, airlines, cruises, and car rental companies.

In the U.S., it enables its customers to purchase a full range of travel services under the traditional price disclosed model (in which it earns a commission) or lets them bid for services at discounted prices under the 'Name Your Own Price' model, where it earns the difference between the price an individual is willing to pay and the price charged by the travel service provider (hotel, airlines, etc). The travel sector was beaten down in 2020 as the onset of the pandemic led people to stop traveling, forcing travel companies such as BKNG to close global offices and eliminate a quarter of their workforce. Even so, the company's business is recovering gradually as it saw a 56% growth in 2022 and a 61% growth in revenues in 2021, after falling 55% in 2020. BKNG's ongoing investment in alternate accommodation, payments, flights, and merchandising should help it gain a share of the broader travel market in the long term. In addition, the company's structurally higher profitability, compared to the pre-pandemic levels, looks like a win.

The World Travel & Tourism Council believes global tourism revenue will grow for a third year in a row in 2023, coming within 5% of 2019's levels en route to a full recovery by 2024. As for business travel, Deloitte says it's also on the road to recovery, and should eclipse its pre-pandemic peak by late 2024 or early 2025.

SOURCES OF VALUE

We believe that International Business and Hotel Bookings are the main sources of value for Booking Holdings -

1. High Growth in the Online Travel Industry Outside the U.S. (International Business)
• With the acquisition of Booking.com, Agoda, and TravelJigsaw, Booking Holdings has been focusing on developing its international operations. BKNG's total revenues from its businesses outside of the U.S. increased from $6 billion in 2020 to $14.8 billion in 2022.
• The rising income levels and expanding middle class, combined with high population growth rates in emerging economies such as China, India, and South-East Asia are expected to contribute to an increasing number of people traveling to and from these regions.
• The extremely competitive online travel industry in the U.S. has led to lower revenue margins and high promotional spending, thereby eroding operating margins in the industry. Booking Holdings' key rival, Expedia, acquired its marketing partner Travelocity and acquired Orbitz (the third largest OTA player in the U.S.), among others.
• The internet is expected to become increasingly integral to the travel planning process due to increasing worldwide online penetration, particularly given the capability that the internet provides travelers to refine searches, compare destinations, and view real-time pricing. With internet penetration currently estimated at 64% globally (~94% in North America, over 95% in Europe, ~ 72% in Latin America, and ~ 67% in Asia), BKNG has the potential to grow in all markets.
• The lack of standardization in travel services outside the U.S., along with a fragmented lodging industry in Europe and Asia Pacific, leaves much scope for premium pricing. Hence, Booking Holdings stands to make higher revenue margins from its international business.

KEY TRENDS

The following factors determine the fate of the online travel industry:

1. Macroeconomic Environment
• Due to the discretionary nature of leisure travel, the online travel service providers, which earn revenue in the proportion (and as a percentage of) travel bookings, depend entirely on the macroeconomic conditions (employment levels, inflation rates, etc). Corporate travel is, in fact, one of the indicators of economic activity and is influenced the most by the ongoing macroeconomic conditions. During a recessionary period, both corporate and leisure travel plummets. Amid rising unemployment and declining disposable income levels, consumers cut back on their travel plans first before making adjustments to other expenses.
• Advertising, which constitutes a significant source of revenue for online travel service providers, too, depends on the level of business activity. During recessionary times, businesses cut back on media and advertising spending and this translates into lower online advertising revenue for travel portals such as expedia.com, priceline.com, etc.
2. Foreign Exchange
• Leisure travelers, unlike corporations, do not hedge themselves against foreign exchange fluctuations. Hence, the spot foreign exchange rates determine the consumer demand for international travel. In times of adverse foreign exchange rate movements (such as a depreciating dollar), international travel becomes dearer, and the same hotel booking and air tickets cost more dollars, thereby discouraging travel bookings.
• Travel Service Providers, such as Booking Holdings, earn revenues from international bookings in foreign currencies, incur most operating expenses in dollars, and report the earnings in dollars. Thus, any adverse foreign exchange movement could erode profits. Since an increasing proportion of bookings are coming from the less penetrated emerging economies, the exposure to foreign exchange is only expected to increase in the future.
3. Fuel Prices
• Rising fuel prices have the immediate impact of increasing airfares, which discourages travel. This not only impacts Air Ticket bookings but reduced travel also negatively impacts hotel bookings and destination services such as car rentals and cruises. A decline in overall bookings impacts travel service providers' revenues.
• With a rise in fuel prices, airlines are no longer able to offer significant discounts on bulk bookings to travel agents such as BKNG. The result is that the revenue margins earned by travel service providers (under the Merchant model) take a hit. The lower revenue margins translate into lower profit margins for the travel service providers.
4. Impact of Unforeseen Events on the Travel Industry
• Events that are beyond the control of any travel services provider, and can critically impact travel, including terrorist attacks, unusual weather patterns, and natural disasters such as hurricanes, tsunamis, volcanic eruptions (April 2010, volcanic eruption in Iceland), travel-related health concerns such as Influenza H1N1, avian bird flu, SARS, etc, political unrest, and other unpredictable events. Unlike other industries, such events have a very significant impact on travel bookings and consequently on the revenues of travel service providers.
5. Airline Industry
• Fuel expenses constitute the single largest cost head for airlines, making them vulnerable to hikes in crude oil prices. To reduce vulnerability to fuel price volatility, many airlines engage in fuel price hedging.
• Demand for flights is highly correlated to global economic growth. Thus, a decline in economic growth, or recession, reduce demand for flights, impacting passenger traffic for airlines. On the contrary, steady growth in the global or U.S. economy, grows demand for air travel, allowing airlines to raise their airfares, occupancy rates, and profits.
• Many airlines are figuring out ways to grow their top lines through ancillary means such as baggage fees, access to onboard WiFi/food/drinks, etc. Accordingly, airlines are investing to enhance their product offerings that include in-flight WiFi and other entertainment options, improved lounge facilities, and extra legroom seats.
• During the past decade, low-cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we believe these low-cost carriers to continue to grow their market share, as their lower fares attract passenger traffic.
• The U.S. airline industry has seen many mergers and acquisitions in the last decade including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways. A more consolidated industry has worked to improve the profits of all airlines. Fewer players in the market have made it easier for those remaining airlines to add capacity with restraint. Prior to this consolidation in the airline industry, individual airlines were adding capacity at higher rates in an attempt to grow their market shares. This rapid capacity addition resulted in an oversupply of seats, reducing the margin and profits of all carriers. Going forward, we believe as long as airlines add capacity with discipline, the industry will remain profitable overall.


6. Hotels and Lodging Industry
• Hotel Bookings offer a markedly higher Revenue Margin (Revenue earned by the travel service provider as a percentage of the size of booking) at over 19% compared to Air Ticket bookings (~3%), Cruises and Car Rentals (~9%).
• The hotel market in Europe and Asia is much more fragmented with smaller, independent lodgings compared to the U.S., where the hotel market is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites, while online travel agencies such as Expedia are more appealing to small, independent hotels outside the U.S. Also, travel agencies stand to make higher revenue margins from independent budget hotels under their merchant business model. Hence, expansion into hotels in Asia and Eastern Europe presents a growth opportunity for U.S.-based online travel service providers.
7. Online travel services is a highly competitive niche segment within the travel industry
• Competition in the U.S. online travel industry remains intense, and traditional online travel companies are creating new promotions and consumer value features in an effort to gain a competitive advantage over competitors.
• Since consumers are now increasingly hunting for bargains and discounts, Traffic obtained through online advertising has increased as a percentage of total demand, since the same consumer visits several websites before making a purchase. This increased shopping behavior has reduced advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on the website. Therefore, online advertising expenses have increased at a faster rate than gross profit, a trend that is expected to continue.
8. Threat from Online Search Engines
• Large, established Internet search engines, with substantial resources and expertise in developing online commerce and facilitating Internet traffic, are creating and intend to further create inroads into online travel, both in the U.S. and internationally.
• Google's acquisition of ITA Software, Inc., a major flight information software company, has enabled it to create its own flight search tools which enable users to find flight information on the Internet without using the services of Expedia or Booking Holdings, etc. Google has also invested in HomeAway, a vacation home rental service.
• In addition, Google has launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements.
• Microsoft has launched Bing Travel, a “meta-search” site, which searches for airfare and hotel reservations online and predicts the best time to purchase them. “Meta-search” sites leverage their search technology to aggregate travel search results for the searcher's specific itinerary across suppliers, travel agents, and other websites and, in many instances, compete directly with online travel service providers.