Booking Holdings' Greatest Strength Is Only Growing With Time

Over the last ten years, Booking Holdings (BKNG 1.41%) shares have averaged returns of over 30% each year, and they've delivered this market-crushing performance in a remarkably steady fashion.

In this video, the team looks at the significant advantage that comes from Booking's scale and appetite for acquisitions, before discussing how the simple concept of increasing available hotel inventory on its various sites translates into enviable performance.

A full transcript follows the video.

This video was recorded on June 19, 2018.

Vincent Shen: Let's move on now to the other end of the spectrum that I mentioned. Now, we'll talk a little bit about Booking Holdings.

Formerly known as Priceline, this is a huge company, over $100 billion in market cap. Even though TripAdvisor is less than a tenth of that size, and it's been dinged for really failing to deliver the growth that investors want for the past several years, Booking Holdings is on an absolute tear, with about 20% growth in the top and bottom lines last quarter.

The thing that always shocks me about this company is the breadth of its full portfolio. If you've heard of booking.com or Priceline or KAYAK or rentalcars.com or even OpenTable, guess what? Those are all under the same Booking Holdings umbrella. Really impressive. With that kind of reach and that kind of consistent growth, the stock has been very, very kind to shareholders. The company is quite a favorite here at Fool HQ. What do you think is the secret sauce here, Asit, in terms of the strength of this business?

Asit Sharma: What I love about booking.com is, it has an extremely simple strategy, and that is to take the market by brute force. The company only has a very small portion of the total market share for travel, as big as it is. Among online travel agencies, it's quite huge. But, as Vince had mentioned, booking.com has grown by being a serial acquirer. Just to give you a couple of other names besides the ones you called out, I'll list Agoda, OpenTable, I think you said that, and momondo.com, which I've used before to isolate flights that didn't show up on other engines, which were actually owned by booking.com.

This strategy of tacking on is really a brute force mechanism to increase inventory. If you look at some statistics from the very last quarter that's been recorded, booking.com had approximately 1,740,000 properties on its website as of March 31st of 2018. That comprised 415,000 hotels and resorts, and approximately 1,325,000 homes, apartments and, they call them, other unique places to stay. I hope we have time to talk about the alternate lodging market in just a moment here.

The company hasn't grown this way through organic growth, but having its sales force go out and acquire more and more hotels for its listing on its original site, priceline.com, as you point out, Vince. Using capital from its pretty high margins to keep buying up more what is essentially hotel inventory, is the way that it's grown. It's a different strategy than TripAdvisor, which is smaller, more specialized, relies on content to drive its growth. This is a very easy-to-understand economic engine. And if you doubted that engine several years ago, you would have missed out on a lot of return.

It doesn't have quite the allure of a really, really highly technical company. Basically, it functions very similar to the way it did when it first originated. However, that's led to -- let's look at this most recent quarter again -- gross bookings were up 25% to $25 billion. Now, that's not the company's net. The company's net sales out of that were $2.9 billion. But, you can imagine what it takes to achieve $25 billion worth of gross bookings. That's a lot of hotel rooms. That's what I love about this stock -- it's really easy to understand how it makes its money, and it's a very consistent earner in that respect.

Shen: Yeah. I will add that, what you mentioned, in terms of, Booking is the industry gorilla, but at the same time, its slice of the pie is relatively small. The total bookings that I could find for 2017, $80 billion. The total digital travel spending for last year, I think, was nearly $600 billion. So, again, a really small piece of that pie, and quite a runway for the company going forward.

In terms of outlook, I think macro factors are really going to influence this business more so than maybe specific competitors, because as the overall travel industry grows, I think Booking is in a really strong position to continue expanding its share of the pie, even though management has acknowledged, quite a few times now, that going forward, the company's growth will decelerate just due to the scale, it being the No. 1 player in this space.