The results for Booking Holdings' (NASDAQ:BKNG) final quarter of 2019 are in, and it's more of the usual: gross travel bookings (value of all services booked on one of the company's sites) growth of 6%, revenue growth of 4%, and adjusted earnings-per-share growth of 4%, all of which handily topped management's forecast provided a few months ago. It was a solid end to a year that began with travel disruption from the extended U.S. government shutdown and slowing global economic growth. Despite numerous fears of recession, travel is on the rise.
Investor reaction to the report has been tepid, though. In fact, Booking's stock has been struggling for three years now, underperforming the market (as measured by the S&P 500 index) by a wide margin. The online travel company has been hit on multiple fronts. In addition to the aforementioned macroeconomic issues, there's been increased competition in the online travel space, a strong U.S. dollar (which lowers the value of Booking's international sales), a general deceleration in growth as Booking has grown, and now the novel coronavirus pandemic.
The latest scare to upend the Booking, Priceline, OpenTable, and KAYAK family-led management to issue weak guidance for the first quarter of 2020: at least an 8% year-over-year drop in gross travel bookings, at least a 3% drop in revenue, and at least a 14% decrease in adjusted earnings per share. Not a fantastic read, but before you rush off to sell, there are a few points to bear in mind.
How big of a deal is pandemic in Asia and Europe?
Regarding the COVID-19 outbreak's origin in China, CFO David Goulden had this to say about the coronavirus-fueled outlook:
The coronavirus has had an impact across our business since it made news headlines on January 21. The early impacts were increased in China, but we also saw these impacts across Asia and, to a lesser extent, in other regions outside of Asia as well. To help with context, the APAC region represents a little over 20% of our room nights with no single country accounting for more than a mid-single-digit share of total room nights.
Put simply, travel booking from any single country (except for the U.S.) is a small piece of the whole pie. If the COVID-19 coronavirus outbreak keeps spreading, then investors could expect results to continue to deteriorate. But for the time being, management has already built in current travel disruption plus a little extra for some margin of safety. The coronavirus is taking its toll, but Booking remains in good shape and will likely remain profitable.
Time to rethink the approach to Booking stock
That's the short term, but longer-term it's high time investors start thinking of Booking as less of a high-growth technologist and more of a well-established value stock. Perhaps one of the more telling signs that the days of all-out expansion are in the past was management's comments that emphasizing cost optimization is a top priority in 2020. Being an efficient spender is always a good thing, but that's not usually a point that gets highlighted on an earnings call at a high-growth tech company. This dot.com darling has moved on to a new page in its story.
That's not a bad thing. The stock's transition in this slowdown phase hasn't exactly been graceful, but a return to share price expansion is likely in the works. Shares trade for a mere 16.7 times 2019 adjusted earnings per share, and though the immediate future is cloudy, Booking is still investing in new products to maintain its lead in the travel industry. As to progress on that front, CEO Glenn Fogel added this on the earnings call:
We are on a journey to build a multi-product offering, including accommodations, flight, attractions, ground transport and dining, all connected by a seamless payment network and supported by personalized intelligence to provide a frictionless customer experience that we believe will drive enhanced loyalty and support growth.
That "connected trip" project has been in the works for a few years now, supported by Booking's multiple acquisitions to broaden its offerings for all things travel. And if an unknown amount of future growth isn't good enough, there is at least the stock repurchase program that has helped boost earnings. Over $8 billion-worth was repurchased in 2019, and there was another $11.5 billion remaining under the repurchase authorization at year-end. Plus, Booking ended the year with $11.8 billion in cash, equivalents, and investments, only $8.7 billion in debt, and generated $4.5 billion in free cash flow in 2019. That's plenty of extra pocket change for the company to keep investing and return some excess cash to shareholders.
It's been a rough stretch the last few years with Booking Holdings' stock stuck in an up-and-down ride to nowhere, but my money remains invested on the expectation it will soon gain some positive momentum again.