Booking Holdings (NASDAQ:BKNG) has been one of the best-performing stocks of the past 20 years. The operator of online travel booking websites including booking.com, kayak, and Priceline has shown solid growth for the past two decades. 2019 has seen growth slow at the company, leading the stock t0o trade off by as much as 20% from its all-time high in 2018. The company is taking advantage of the dip in stock price to buy back stock -- will this strategy pay off for shareholders?
Growth slowing, but long-term tailwinds remain
When Booking turned in its Q2 2019 numbers in early August, investors were relieved to see the company beat expectations, but that didn't change the fact that growth has slowed significantly from the mid-teens rate of 2018. The company reported revenue growth of 8.9% and operating income growth of just 2.1% in Q2 2019 compared with Q2 2018.
|Metrics||Q2 2019||Q2 2018||YOY Change|
|Revenue||$3,850 million||$3,537 million||8.9%|
|Operating income||$1,247 million||$1,221 million||2.1%|
|Room nights booked||213 million||191 million||11.8%|
|Rental car days booked||21 million||21 million||1.2%|
|Airline tickets sold||2 million||2 million||2.4%|
The company blamed a strong U.S. dollar and macroeconomic weakness in Europe as key contributors to the slowdown in revenue growth. Because Booking generates most of its sales internationally but reports its financial statements in U.S. dollars, a strengthening dollar decreases the value of its revenue after considering currency conversion. The company noted that revenue growth would have been 14% if currencies had not fluctuated from the prior year.
The company's paltry 2.1% operating income growth was pinned on a combination of rising paid advertising costs and investments being made to build out new technology capabilities and products. Buying key travel terms on search engines such as Google (owned by Alphabet) is not as cost-effective as it once was for spurring growth. In addition, Booking has been investing in its payments platform and initiatives to improve its non-hotel bookings capabilities, such as apartment sharing and local activities. These investments have caused expenses to grow faster than revenue for the time being.
Despite the headwinds from foreign currency conversion and investments being made in the business, Booking is still riding the long-term tailwind of growth in online travel bookings driven by an increasing desire for people around the world to travel and the growing preference to make accommodations online, as opposed to offline. This is evident from the 11.8% growth in room nights booked, a strong indicator of organic growth. However, the company has cautioned investors of low guidance, implying a continuation of sub-10% growth through the balance of the year.
Massive stock buybacks
While growth has recently slowed for Booking, it still generates a healthy amount of cash flow. In recent years, the company has used some of this cash flow to buy back its own stock, reducing its share count and helping to grow earnings per share.
As the company's stock price has faltered over the past year, it has doubled down on share repurchases. For the first six months of 2019, Booking spent $5.5 billion on share repurchases, more than twice the $1.9 billion it spent on repurchases during the first half of 2018.
By stepping up purchases of its own stock, Booking is signaling that it believes its stock is cheap and worth buying at current levels. Of course, reducing the share count also has the effect of improving growth in earnings per share because of the smaller denominator. This can help Booking show continued strong EPS growth, even if organic earnings growth is tepid.
Investors have apparently reset their expectations for lower growth at Booking after a disappointing start to the year. Q2 2019 saw current headwinds mute revenue growth, while the company put a damper on its margins by spending aggressively on investment initiatives.
Looking out over the long term, Booking still has growth tailwinds from a rise in travel spending. The current slowdown most likely will turn out to have been a bump in the road. If that's the case, the aggressive buyback program at the current stock price will be looked upon favorably and accelerate the recovery in the stock price.