As the dot-com bubble in the stock market was inflating, famous actor William Shatner put travel booking website Priceline.com on the map with a series of popular commercials. Priceline has since changed its name to Booking Holdings (BKNG 2.05%), and it's performed marvelously for shareholders over the last 20 years, up more than 11,000%.
With references to the dot-com bubble and 20-year historical returns, you may feel Booking Holdings is past its prime. However, there is an important transformation happening at the company that could pave the way for a major innovation fueled by artificial intelligence (AI).
Why are payments important for Booking?
Travelers can book trips directly with travel service providers like hotels and airlines. However, it often makes a lot of sense to go to a centralized party like Booking to compare various options. When travelers make a reservation on its platform, Booking generates revenue. In fact, most of the company's revenue comes from travel reservations.
For years, Booking didn't have its own payments system. Therefore, its revenue was based on commissions -- travelers ended up paying travel service providers directly, and Booking earned a commission when people actually took their trips.
This stands in contrast to a company like Airbnb, which handles its own payments. When travelers book through Airbnb, the company takes the payment, keeps a percentage for itself, and pays the host the difference.
Booking's business has evolved in this regard, and management is increasingly focused on growing payments on its platform. The results thus far have been promising.
The company divides revenue into different sources with merchant revenue representing reservations made with Booking's own payments system. In 2019, just 25% of Booking's revenue was merchant revenue. In 2022, this source had jumped to 42% of total revenue. And in the first quarter of 2023, merchant revenue grew 67% year over year to reach 46% of revenue.
There is a cash-flow benefit to growth in direct payments for Booking, which I won't discuss here. But I will explain why growth of its payments platform is important to the big picture.
Booking's management has a long-term vision that it calls the "connected trip." Basically, it wants to provide travelers with a one-stop, personalized travel service. But without a native payments platform, Booking's users interact with multiple parties, which conflicts with the connected trip vision.
Growth in payments brings Booking one step closer to realizing its vision. And now, AI may provide the final boost necessary to get the company over the top.
What's the future AI innovation?
It can be hard to remember all the way back to life prior to online travel agencies (OTAs). But real-life travel agents did far more than just help you book your travel. They also helped you plan your trips. Booking and its rival OTAs help make travel reservations, but standard technology simply can't provide personalization at scale efficiently.
AI could change that. Booking CEO Glenn Fogel recently said, "We can build a more compelling and differentiated offering if we can leverage AI technology to deliver a more personalized booking experience, a connected trip that would be more responsive to a booker's needs and help manage different aspects of their trips."
If AI can help OTAs, then it's likely that multiple companies will adopt the technology in some form. But with Booking, the connected trip vision is pretty interesting. And as the largest OTA, it has an extensive list of partner travel providers that could make its personalized travel services the very best.
In summary, growth in payments and the advent of AI could allow Booking to achieve its connected trip vision and make it the most compelling travel booking platform around. This could be a big opportunity for its business.
What about Booking stock right now?
Now, here's the kicker: Even though Booking stock is currently hovering around an all-time high, its shares are about the cheapest they've ever been from a free-cash-flow perspective. The stock trades at just 14 times trailing free cash flow as the chart below shows.
Data by YCharts.
Booking has already proven itself as a long-term market-beating stock. Business is good, and shares are cheap, which means there's little downside risk for those who invest today. But looking ahead, the business also has a potential catalyst with its connected trip vision, which means there could be solid upside.
It is that attractive risk-reward proposition that should convince investors to give Booking stock a hard look today.
