Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Booking Holdings(BKNG 1.14%) Q2 2019 earnings report was a blockbuster. The online travel booking specialist earned $22.44 per share on $3.9 billion in sales last quarter, and beat consensus earnings estimates with a stick.

But one analyst doesn't see much chance of a repeat.

Five dice labeled buy and sell on top of LCD screen displaying charts and numbers

Image source: Getty Images.

Downgrading Booking Holdings

This morning, investment banker Merrill Lynch took an axe to Booking's rating. Although the analyst left its price target of $2,160 intact, it noted that with Booking shares within just "6% of our $2,160 PO," it no longer sees enough potential for profit to keep the stock at buy, and so downgraded Booking Holdings to neutral instead.  

Merrill has two main reasons for its pessimism:

  • Greater competition expected next year from Asian rival Ctrip, and also from Airbnb, which is expected to hold an IPO that will make it flush with cash and a stronger competitor.
  • A "well publicized" slowdown in travel bookings online, which is expected to get worse this quarter in Asia specifically.

On the plus side, "street booking/room night estimates" suggest a "modest acceleration" in demand next year, an improvement after "3 years of deceleration."

One positive factor doesn't outweigh two negatives, however (or at least not in Merrill's opinion). For that reason, the analyst is lowering its rating on Booking Holdings stock.

Great expectations

Should you be scared?

Booking Holdings isn't.

Merrill's misgivings notwithstanding, when Booking issued its own guidance back in August for what to expect in Q4, management reminded investors that it's now transitioning into its "peak travel season." And while the slowdown Merrill mentions is real -- Booking warned that sales could be as much as 8% below Wall Street's estimates at the time -- pro forma earnings guidance was nonetheless significantly above Street predictions, and up from Q3 2018 levels as well.

Since those earnings came out, of course, analysts have largely been persuaded over to Booking's management's point of view and have raised their estimates. Consensus projections now call for the company to grow its sales nearly 6% year over year to $5.07 billion, and to earn more as well -- $44.52 per share pro forma, or 18% better than last year.  

Valuing Booking stock

Of course, the downside to Booking persuading Wall Street that things are going to work out just fine is that the stock has now become more expensive. After jumping 6.5% in response to the company's Q2 report, shares have gained an additional 5% in the three months since.

Result: At $86.6 billion in market capitalization, Booking Holdings stock sells for a not-cheap valuation of 22.5 times earnings today, heading into Q3 results that are expected to come out next week.  

Granted, if all works out as planned, and Booking succeeds in growing its earnings 18% in Q3 -- defying Merrill's predictions -- the stock's premium price may turn out to be justified. The company does, after all, sport better free cash flow than its net income usually reflects -- $4.6 billion in "cash profits" generated over the past year, versus $4.2 billion in "accounting profits."

Still and all, hard as I try to make the numbers work, even under optimistic scenarios Booking Holdings shares look at best fairly valued to me, and probably a bit overpriced for an 18% growth rate. My best advice at this point, therefore, is to take Merrill Lynch's advice:

Step aside for the moment, wait, and hope Wall Street overreacts to a "poor" or "mixed" earnings report. If Booking Holdings stock suffers a big enough pullback next week, it could become cheap enough to buy into once again.