It's been over three months since I last caught up with Booking Holdings (NASDAQ:BKNG), and things have changed just a little bit since then. The novel coronavirus was beginning to manifest as a serious problem in February, but it wasn't apparent that an economic lockdown was going to happen, or how extensive it would be. 

I recently decided to part ways with my final shares of Booking Holdings -- at least for now. A confluence of factors weighed on my decision, but ultimately I think this tech giant will underperform the market for a while after it rallied since the worst of the market crash in March.

An empty hammock on a tropical beach

An empty hammock on a tropical beach is a sad reality in too many parts of the world right now. Image source: Getty Images.

Pain was priced in, briefly

When Booking Holdings reported on its final quarter of 2019 and provided an initial outlook for 2020, China and other parts of Asia were bearing the full brunt of the COVID-19 fight. That was already factored into the first-quarter outlook, when Booking called for at least an 8% year-over-year decrease in gross travel bookings, a 3% decrease in revenue, and a 14% decrease in adjusted earnings per share. But as the pandemic spread, the results in Q1 were far worse than expected. 

Gross travel bookings (the value of services booked, net of cancellations, with one of the company's sites, including Booking.com, Priceline.com, Agoda, and KAYAK) got cut in half in the first quarter, leading to big drops in the top and bottom lines. 

Metric

Q1 2020

Q1 2019

Change

Gross travel bookings

$12.4 billion

$25.4 billion

(51%)

Revenue

$2.29 billion

$2.84 billion

(19%)

Adjusted net income

$156 million

$508 million

(69%)

Data source: Booking Holdings.

The travel industry has been among those hardest hit by the pandemic, and it's unclear how long economic activity therein will remain muted. But I think it will last longer than Booking's stock price seems to imply. The company didn't provide any guidance when it reported first-quarter results in early May, except that it believes it will be just fine in the long run. (I agree, but that's not the issue here.)

As for the stock itself, shares briefly tanked nearly 45% in March, but have rebounded and are now sitting on just a 15% decline for 2020 to date. A really fast rebound in global travel is being implied, but I'm unsure -- and so is management. CEO Glenn Fogel had this to say on the Q1 2020 earnings call on May 7: 

On a smaller, but somewhat positive note, we are seeing some stability in our newly booked room night growth trends. We hope that this is the beginning of the road back to recovery, but it's certainly too early to say with certainty. Some governments have seen progress in limiting or reducing the pandemic. They have slowly begun to reopen their economies and we have seen new bookings, primarily for domestic travel, although still at very low levels. Some or many of these reservations may ultimately be canceled, but we believe it does show that travel for essential business and personal reasons will slowly return as society makes progress against the pandemic. And as travel returns, we expect to see improvement in our revenue. 

Still, with Q1 gross bookings falling by half, and a possible bottom only just beginning to be apparent in May, Q2 could be just as rough. Ongoing uncertainty no longer appears priced into Booking Holdings shares.

I got tired of "buying the dips"

Granted, a lot has changed in the month since Booking's Q1 report. China, along with the rest of Asia, is already on the road to recovery, and the U.S. and Europe are in the early stages of opening up. But still, it's going to take time for travel to rebound, and it's unclear just how soon things will ramp back up, with remote work and video conferencing looking primed to replace a lot of in-person meetings. 

Booking stock trades for 19.3 times trailing-12-month free cash flow (revenue less cash operating and capital expenses), a figure that is bound to get worse as quarterly results for the rest of 2020 start to lap results from 2019, when travel was still firing on all cylinders. The upside for the stock at this particular juncture looks limited. Plus, Booking has been a market underperformer now for three years. It's been a volatile ride ending nowhere, and the company's transition from high-growth technologist to value stock has begun to look less than graceful -- especially considering all the cash used in share repurchases over that span of time that haven't done much other than keep the stock treading water. Simply put, there have been far better places to invest over the last three years, and given the rally now priced in, now seemed like the time to part ways for the moment. 

BKNG Chart

Data by YCharts.

I am a value investor at heart, but Booking Holdings just doesn't look like a value to me. When would I consider purchasing again? When the price drops. It's clear that Booking and the rest of the travel industry may be in the early stages of picking up the pieces post-pandemic, but if I'm going to purchase a recovery stock, I'd like to purchase it with a recovery price tag attached.

About $1,200 a share -- where it was in March during the worst of the downturn -- would be fantastic. Granted, that may not be a realistic expectation, so if there was about a 20% pullback (bringing the share price down to $1,400 to $1,500), which would put a valuation of about 15.0 to 16.0 times price to free cash flow, I'd be interested again. Or if solid evidence emerges that travel activity is indeed coming back with a vengeance, I might change my mind and purchase again without requiring a significant pullback in price. 

But at this point, Booking doesn't quite fit the bill for me with the premium valuation and uncertain outlook for the rest of 2020.