Is The Market Pricing Booking Holdings Fairly?

Booking Holdings (NASDAQ: BKNG) (formerly known as Priceline) has performed strongly over the past couple of years, with over 17% annual growth in revenue and a 58% jump in the stock price in between 2015-2017. The company has a leading position in terms of gross bookings, globally. With a target of significantly increasing the properties on its online accommodation booking website, Bookings.com, for 2018 in compared to the previous year; the acquisition of Kayak (a metasearch website) and Momondo, in order to remain competitive with Expedia; and increase investments to cater to international markets — this bodes well for the company’s growth outlook. Our price estimate of $2,127 suggests that the market is pricing Booking Holdings fairly.

We have also created an interactive dashboard which shows our forecasts and estimates for the company; you can modify the key value drivers to see how they impact the company’s revenues, bottom line, and valuation.

Steps To Arrive At Our Price Estimate

Booking Holdings generates revenue from three segments: Agency revenue, Merchant revenue, and Advertising and other revenue. We expect Booking Holdings’ Agency gross bookings to hit $82.94 billion in 2018. The company has witnessed increased gross bookings over the past couple of years, primarily due to the bookings on Booking.com.  Booking.com added over 460,000 properties in 2017 to take the overall count to 1.6 million. Despite a slight decline in average daily rate, a significant growth across the night rooms booked, led to increased revenue from this segment. With a take rate of 14.2%, which is similar to the figure for the past few years, we estimate Agency revenue of $11.8 billion for 2018.

We expect Booking Holdings’ Merchant gross bookings to hit $13.84 billion in 2018. The company has witnessed increased gross bookings over the past couple of years, due to increased gross bookings across room nights, rental and car days on its different websites, such as agoda.com, priceline.com, and rentalcars.com.

With a take rate of 18%, which is less than the previous year’s figure, we estimate Merchant revenue of $2.49 billion for 2018.

Further, we expect $967 million revenue from Advertising and others for 2018. Revenue has grown at nearly 17% annually in the past two years, primarily due to advertising on the company’s metasearch website, Kayak.com, and restaurant booking website, Opentable.com. A significant part of the revenue growth in 2017, was attributed to the acquisition of Momondo.

As the company realizes the costs associated with the recent acquisitions and increased investment to strengthen the technological capabilities, this could lead to a slight decline in net margin. We expect Booking Holdings’ net margin to decline slightly to 17.5%.

A revenue estimate of $15.27 billion results in net income of $2.67 billion. Given the average share count of 48.99 million, this gives us Earnings per share of $54.53. Keeping in trend with the growth over the past two years, we expect Booking Holdings’ trailing twelve-month P/E multiple to be around 39 at the end of 2018, which when multiplied with expected earnings per share, gives us $2,127 as a fair price estimate.

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