American investors might know Booking Holdings (NASDAQ:BKNG) better as the company that owns Priceline.com. It recently changed its name to reflect its largest brand, Booking.com, which is much more popular in Europe than the United States.
Call it whatever you want -- the stock has been a big winner over the last decade. The share price has increased 16-fold over the last 10 years, and it's up over 200% over the last five years. Shares are up 22% this year while the S&P 500 index has been flat.
As more people move to booking travel online, Booking stands to see continued revenue growth, but it could also invite more competition, negatively impacting profit margins. And with the strong price appreciation in the stock, investors may be wondering whether or not it's a buy.
Let's take a closer look.
Only 35% of global hotel bookings take place online, according to research from Credit Suisse. Booking's websites account for around 10% of total hotel bookings, Credit Suisse's analysis finds. Still, there are hundreds of billions of dollars in travel bookings taking place through other channels every year, and that's a huge opportunity for Booking Holdings and competitors like Expedia Group (NASDAQ:EXPE).
As more people book travel online, it's possible a rising tide will lift all boats. The percentage of online bookings is expected to climb to 39% by 2020, growing 28% overall from last year to 2020. Booking is well-positioned to win a large share of that growth with its portfolio of properties in different geographies.
A virtuous cycle
Booking.com is one of the largest online travel agencies in the world, with about 1.6 million property listings between hotels and vacation rentals. Its only competitor with greater selection is Expedia, which boasted nearly 2 million total properties on its platforms, including 1.5 million from HomeAway's vacation rental listings.
But Booking has a substantial advantage in Europe, where it first started. Unlike the U.S. market, the majority of hotels in Europe are small boutique hotels, which are reliant on online travel agencies like Booking.com to attract customers since they have relatively small marketing budgets. Furthermore, those small budgets mean they're limited in their ability to work with multiple partners, so most hotels will only list their properties on a single online travel agency.
That's great for Booking.com, which has strong consumer penetration in Europe. That's evidenced by the Booking.com app's position in the top 10 travel apps in various European countries. Meanwhile, Expedia's app is a lot harder to find on those top 10 lists.
Bringing in more traffic creates a virtuous cycle in that it attracts more hoteliers to the platform, creating better selection and reinforcing the platform as the top destination for travelers.
Booking exhibits similar strengths in Asia with its Agoda property and its partnerships with Ctrip and Meituan-Dianping. Booking.com also has a fairly strong consumer presence in South America, where boutique hotels are also much more popular than chains.
The virtuous cycle means Booking is well-positioned to win more than its fair share of the growth in online travel bookings.
There's a risk that as more travel spending moves online, Booking could face increased competition. For now, Expedia is its biggest competitor, and the two combine to take about two-thirds of the online hotel bookings market.
That level of scale makes it very difficult for a smaller company to make significant headway in the online travel agency space. Online travel agencies require a lot of marketing to attract customers to their websites and they would also need personnel to reach out to hotels to add listings to their platform.
With regard to marketing, Booking is far more efficient than the competition while still spending boatloads. It spent $4.5 billion on advertising last year, 36% of revenue. In comparison, Expedia spent nearly the same amount, but it accounted for 43% of its revenue.
Only a few existing internet companies have the audience, personnel, and marketing budget to make them capable of competing with Booking. (And they're kind of busy dealing with data privacy concerns at the moment.) Even then, Google's past attempt fell flat after the Alphabet company launched a travel app a couple years ago. Smaller companies that start to find success might just be acquired by Booking or Expedia, as we've seen in the past.
A great company, but is it a buy?
Booking Holdings has developed a portfolio of great properties and established a strong competitive advantage, particularly in Europe. It's well-positioned to keep growing revenue and earnings, but investors need to determine whether or not the stock is worth buying at the current price.
The stock currently trades for about 24.5 times expected earnings for 2018 and 21.4 times 2019 expected earnings. That's a pretty high multiple, but with a very strong potential for double-digit average revenue growth over the next few years and expanding profit margin, that actually seems like a fair price.
By comparison, Expedia currently trades for 23.3 times 2018 earnings expectations and 19.5 times analysts' expectations for 2019. Booking might deserve a slight premium to Expedia due to its competitive advantages with regard to boutique hotel booking.
I think investors could do well with either, and Booking could offer better growth over the next few years. For investors looking to capitalize on the secular growth of online travel booking, Booking is still worth buying at its current stock price.