Booking Holdings (NASDAQ:BKNG) owns Priceline, a travel bidding site, and Kayak.com, a site that allows you to compare prices for travel. The stock has struggled a bit in 2019, largely because of weakness in the international market, but it has recovered in its most recent quarter. The company has been a slow growth stock, but it faces major headwinds as its partner brands work to create direct relationships with their customers. That could cut out middlemen like the properties Booking owns.
In this segment of Industry Focus: Consumer Goods, host Shannon Jones talks Booking Holdings with contributor Dan Kline. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 20, 2019.
Shannon Jones: Priceline being just one of the brands under the Booking Holdings umbrella. They've also got the Priceline version, agoda.com in their international reach. Right now, Booking Holdings is in over 230 countries, so they've got a pretty massive footprint. Some of the other brands, I think you mentioned them, you've also got Open Table, rentalcars.com. They've also got KAYAK. KAYAK is interesting to me for a couple of reasons, but I'd say more so because KAYAK operates as really an aggregator of a lot of these online travel sites. The reason why this stands out to me, Dan, is because I've heard Google, I've heard Amazon and other major players are also really beefing up their efforts in this space. So, when I hear that they do have some sort of aggregator, I do get a little bit excited. But what are your thoughts around KAYAK?
Dan Kline: KAYAK, which I use a lot, becomes almost an extra party in the transaction. If I book travel through Priceline, Priceline gets a cut from the airline or the hotel. If I book travel through KAYAK, what happens is, I put in the parameters of where I want to go, and I pick, "Gee, yeah, I'd like to look on Priceline, I'd like to look on Orbitz, I'd like to look on four or five others," and KAYAK brings up these other sites, and it shows me all my different options. I would assume they get paid a small cut if I book. So, it becomes even more slicing up the pie in different ways.
I find KAYAK is a very useful tool for figuring out where the baseline is. Like, I want to travel to this place on this date and stay at this level of hotel -- roughly, what's that going to cost me? Oh, OK, it's $900. Then maybe I'll use other tools to figure out if I can get a cheaper deal. But you need to know what the price range is. Like, flying indirect is going to cost way less than flying direct; some of those things. It's really about doing your homework and doing research.
I don't love KAYAK as a business because I don't see it really being a tool where you complete your travel deal all that often. And the company does not break down each individual segment of its business. But, it is very useful, and it does fit very well with the rest of the family.
Jones: Booking Holdings, as an investor, as I'm looking at financials, I know they started the year pretty weak. A lot of the earnings, apparently some weakness in the European markets. Again, Booking has a massive international presence, particularly in Europe, where you see a lot of those boutique hotels that oftentimes, just due to scale and resources, aren't going to have staff that can list those hotels across all these different sites. So, you've got somewhat of a sticky model, especially in those European markets. So, we saw some weakness there at the start of the year. But it sounds like the most recent quarter, though, we were starting to see some signs of improvement.
I guess the question I would have for you, Dan, is, is Booking Holdings right now still a slow growth story? Or is it really just a value stock right now? I mean, they've gotten hammered.
Kline: It's both, kind of. They are going to grow slowly, but I think there is a major storm cloud facing not just Booking but also Expedia. It's that every brand has an incentive to create a one-on-one relationship with customers. My travel partner of choice, I would say, is Southwest Airlines. And one of the things you notice with Southwest is, they do not appear on any of these websites. That's not 100% true, but in general, they only sell direct to consumers. If I want to fly Southwest, I book through Southwest -- meaning Southwest keeps all the money, they don't have to pay a third party, and that in theory helps them keep their price down. If you've seen the recent Hilton commercials, they are pushing you to go to their app, promising you the best price, or that they'll give 25% back if you find a better price. That's a little tricky, too, because they won't give you a better price if you made a blind bid, because you already have the room, you can't get rid of that blind bid deal.
So I think there's a negative headwind here that more and more companies, whether they be airlines or hotels, are going to start finding ways to create that one-on-one relationship. It used to be, you'd pay a lot more going into a hotel or airline website to book. That is still sometimes true, but there's not a lot of logic in that, because when there are all these alternative sources -- so, I worry about booking.com and Priceline and their ability to operate as a middleman when middlemen may become less necessary.
Jones: Such a great point. Just looking at their Q2 numbers, revenue was up 8.9% year over year. Looks like they brought in $3.8 billion. I think one of the metrics that matters, though, especially for those that are diving into this stock -- and, Dan, I know you've been watching this -- it really comes down to their actual bookings. The bookings is where you should really be focused.
Kline: Yeah. The great news is, they booked 12% more rooms. On the other hand, their income stayed about the same. That means that they're being squeezed on the edges. They're either taking less money as a way to offer consumers lower prices to sell more rooms, or their partners are striking harder deals. They don't really explain which one it is. It could be both of them. You want to see growth in how many rooms they sell because the more rooms also means the more of a habit it is. I actually go to Priceline first when I'm booking hotels. When I'm booking travel or plane flights or rental cars, they are not the first place I go. So, you want to see the habit build. You want to see more people use it. On the other hand, you'd like to see them make more money when they effectively sell more units.
Jones: Exactly. But I have to wonder with this industry in general, and investing in this space, it seems like it's only going to become increasingly crowded moving forward. I mentioned some of the bigger players, but you also have smaller players. Can you expect to see low-single-digit top line growth for most of these companies moving forward? Do you think, in addition to all the things that you mentioned that are actually putting pressure on there, that this is just an overhang on the industry itself?
Kline: Booking is forecasting between 2% and 4% growth for the full year. That's fine. And they may be able to, as a company, figure out how to lower expense. Obviously, they have a huge technology investment, but they don't have inventory. They don't need a lot of things once they get to a certain place. So, they might be able to increase profitability. But, yeah, I think there's increasing competition for where and how you book travel. I got my mail today, and this is going to sound ridiculous, but I had four different direct traveler offers. Two from cruise lines, one from an airline, one from a middleman service. It's like everyone is pelting you. There's new competitors coming in. There's new ways to aggregate. There's new ways to incentivize. So, if you're Priceline, if you're booking.com, you have to constantly be adding new sites or new services in order to cut off people who are offering comparable things. Something Priceline has dabbled in is offering different deals after a certain time of night, meaning, "Hey, it's 7:00, I don't feel like driving all night, I'll grab a hotel room. Hey, here's what the deals are." Well, they're doing that because there's other start-up competitors that, specifically, that's their business. It's like late night hotels, and you're going to pay less because you're not going to be there for 12 hours, but the hotel is going to make some money on a room that otherwise might have gone unoccupied. So, you have to keep innovating, and that's a drag on your eventual ability to just make money.
Jones: Yeah. On top of that, you really have to spend to build the brand awareness. For a lot of these online travel sites, it's ultimately becoming a commodity. For me, when I am looking to book travel, I don't necessarily care which site I'm on; I'm looking for the best price. Whatever is the best price, on whatever site I can find, is who I'm going to go with. You don't necessarily have that strong brand loyalty, so it's really about spending on advertising costs to build brand awareness instead.
Kline: Yeah, and it's really to capture customers. We've all seen the endless Priceline ads. There's plenty of booking.com ads. The reality is, once I've input my credit card somewhere, it's a lot easier for me to purchase there. I don't currently have a credit card with, say, hotels.com, which is an Expedia brand, which we'll talk about soon. So I might find a great price there, but if Priceline's pretty close, I might book through Priceline just because I don't want to have to type in all my information and remember that I have a credit card another place. The reality is, advertising is all about driving someone to make that first purchase, and if that first purchase goes well, that probably becomes another tool in your arsenal where it's much easier to use it. That's partly why I use Priceline for rental cars sometimes. Sometimes I book through Southwest, where you don't have to pay until you pick up the car; sometimes I book through Priceline, where, depending how you bid, you may pay when you pick it up, or you may pay, if you do a blind bid, beforehand. But those are the two companies that have my credit card. I'm not necessarily going to go search out a slightly better deal but have to go through it all again.