In just two months, Booking Holdings (NASDAQ:BKNG) has experienced one of the toughest challenges in the history of the company. The COVID-19 pandemic has upended life as we know it, causing unprecedented border closures, curbs on traveling, and the shutdown of shopping malls, factories, and food outlets. Many countries are still struggling to contain the coronavirus, and the tragedy is both a human one and an economic one.

Booking's share price has plunged 33% year to date, and it seems the fall was justified. The company's first-quarter 2020 earnings report showed gross travel bookings plunged 51% year over year, while room nights booked (for hotels) declined by 43% over the same period. 

Leisure travel is a discretionary expense for many. The question now is whether Booking Holdings stock remains a buy despite the strong headwinds and lingering uncertainty.

Lady holding credit card and searching for flight on laptop

Image source: Getty Images.

Demand destruction

The pandemic has resulted in severe demand destruction within the travel and tourism industry. Airlines, cruise ships, and hotels have witnessed plummeting sales and are the hardest-hit industries. As Booking's core business is tied to airline, hotel, and meal reservations, it will undoubtedly experience a significant and adverse effect within the second quarter.

Some of this negative effect is already showing -- newly booked room night reservations, excluding the effects of cancellations, plunged by over 85% in April 2020 compared to the same period last year. Management continues to see severely reduced travel and restaurant reservation bookings for the foreseeable future.

To add to Booking's troubles, another three million people filed for unemployment last week, resulting in more than 33 million jobless claims being filed in the last seven weeks alone. The unemployment rate is set to soar to a level unseen since the Great Depression. This grim statistic means that even fewer people will have the propensity and capacity to spend on a vacation, further adding to the company's woes.

A crippling chain reaction

The fall in revenue isn't the company's only challenge. With increased volatility in financial markets and financial difficulties faced by travel service providers and restaurant partners, these factors may result in the company's various partners being unable to settle the amounts they owe promptly. 

The company has increased its provision for expected credit losses on receivables. If a wide swath of these service providers goes under due to the pandemic, it will result in further losses and also a worrying lack of cash inflow, just at a time when Booking needs it the most.

Liquidity concerns

Booking ended the quarter with around $9.2 billion of cash and short-term investments, while total debt (including convertible debt) stood at $8.5 billion. With revenue falling off a cliff, the company will also surely report a significant loss and suffer from negative operating cash flows. Investors may be worried as to whether the company may run out of cash, given that the crisis has yet to abate and there is seemingly no news regarding the lifting of travel restrictions around the world.

Fortunately, CFO David Goulden mentioned in the recent earnings conference call that the company had amended its revolving credit facility to substitute a minimum liquidity covenant that was due in 2021. A convertible note offering was also completed on April 8 that raised $4.1 billion in capital. This pushes up the total cash and investments balance to around $14.3 billion, of which $12 billion remains highly liquid. Total debt also increased to the tune of around $13 billion, of which $4 billion matures before the end of 2022.

A value trap

The company looks deceptively cheap at this point, trading at just 17 times trailing earnings. However, with revenue potentially falling 85% or more due to the pandemic, Booking will almost surely see significant levels of losses for the current fiscal year.

Due to the uncertain and evolving nature of the pandemic, it may take an extended period before air travel and tourism regain normalcy, if ever. Booking may continue to suffer from adverse effects even after lockdowns are lifted, as no one knows how the post-pandemic landscape will look. There may even be structural changes for the affected industries that may alter the competitive dynamics or customer behavior for the foreseeable future.

At this point, Booking feels like a potential value trap. While it may seem cheap as its share price has been battered down, I feel that more pain has yet to come. Investors may be better off avoiding Booking for now and instead choosing a business that has been less adversely affected.