What happened
Shares of Booking Holdings (BKNG -0.43%), Southwest Airlines (LUV -6.96%), and Uber (UBER -0.07%) all fell on Wednesday, down 3.5%, 3.6%, and 2.3%, respectively, as of 1:20 p.m. EST.
As recession fears loom over the economy, it appears several analysts and investors are turning cautious on travel names toward year-end. 2022 had been an extremely strong year for travel, despite rising prices, as consumers appeared to take that trip they'd been wanting to take following the pandemic.
However, despite strong current consumer spending, about 98% of CEOs expect a potential recession next year, according to business research group the Conference Board. With that much pessimism hanging over the economy, some analysts are downgrading travel names today despite the seemingly positive current picture.
So what
On Wednesday, Wolfe Research analyst Deepak Mathivanan came out with a note downgrading the entire online travel agent (OTA) sub-sector to "underweight" from "market weight." As the leader in the OTA sector, Booking Holdings fell along with the dour commentary. Mathivanan believes 2023 earnings estimates don't reflect the magnitude of the coming travel slowdown. He also believes that OTAs have had to adopt less efficient customer-acquisition means, which means their unit economics will be hurt going forward.
One small silver lining for Booking investors is that Mathivanan only downgraded Booking to "perform" from "outperform," so he is more optimistic Booking can weather the downturn better than peers Expedia (EXPE 0.33%) and Tripadvisor (TRIP 0.34%).
The malaise on travel names even extended to Southwest Airlines (LUV -6.96%), which took the seemingly positive step of reinstating its dividend at its Investor Day today. Like other airlines, Southwest had suspended its dividend during the outbreak of COVID-19 back in 2020. But apparently management believes the strong demand and profits it has seen this year now enable it to resume payments. The quarterly dividend will total $0.18, or about a 1.9% annualized dividend yield at this price, and will be paid to shareholders of record as of Jan. 10.
Another reason for the drop today could be that the stock had run up nicely heading into today's investor day. Some investors might have hoped for a positive-earnings pre-announcement heading in, but Southwest only reaffirmed its previously stated guidance, so there may have been some disappointment there.
Finally, Uber is also feeling the heat today, although there isn't much company-specific news. On the negative side, Uber was fined $14 million today by Australian authorities for misleading customers regarding the threat of cancellation fees it was not actually charging between the years 2017 and 2021. However, that fine was less than regulators wanted and really a pittance against Uber's financials.
On the positive side, Uber announced it would now be offering autonomous Uber rides in Las Vegas in partnership with Motional, a joint venture formed between Hyundai (HYMTF -0.82%) and Aptiv Plc (APTV -1.78%). The two have a 10-year agreement to scale autonomous driving city by city. Still, that bit of exciting news was overwhelmed by the market's consternation about travel spend next year.
Now what
Just as technology boomed during the pandemic and then suffered a hangover in 2022, could travel stocks, which had a nice past 18 months, suffer the same fate in 2023? That certainly seems to be the sentiment today. However, much will depend on the path of inflation as well as the reaction of the Federal Reserve with its interest rate hikes and balance sheet runoff.
Given the negative sentiment, investors should tread carefully in travel-related names for now. Any buys in the space should have high conviction and a unique company-specific story. Otherwise, it may be a tough environment over the next six to 12 months for these names.
