There's a reason people consistently come back and shop on Amazon instead of with smaller online retailers: It's a better experience. It's that superior experience that Glenn Fogel, the CEO of Booking Holdings (BKNG 0.53%), is trying to build for his company's websites in the travel industry. And it seems to be working.
Despite its leading market share, Booking grew its gross bookings faster than the competition in the second quarter, up 15% year over year. Expedia Group (EXPE -0.40%) grew at one-third the rate, and Airbnb (ABNB 0.75%) grew just 13% year over year.
Booking Holdings is growing by following the same playbook as Amazon: providing a better experience.
The big advantage Booking Holdings has over almost everyone else
If there's one area investors can point to that explains how Booking Holdings can expand its market share now and for the foreseeable future, it's scale.
Booking has a tremendous network advantage when it comes to its lodging options. It counts over 3.1 million properties, including 450,000 hotels. Its next closest competitor, Expedia, says it has 3 million properties, but over 2 million of those are on the Expedia-owned vacation rental site VRBO. It aggregates 940,000 hotels and alternative lodging arrangements on its main websites.
The ability to offer more selection is a big advantage. It's one reason shoppers go to Amazon over smaller retailers: They know they'll find plenty of options at any price point.
It's also an advantage that's costly to overcome. Booking's relationships with small boutique hotels across Europe and Asia aren't easily replicated. Competitors have to convince small business owners to set up a new relationship when they're already getting enough traffic from Booking's websites. Not only does it cost competitors money, but it also simply takes a long time to build that network.
And Booking isn't just sitting on its hands. It's leveraging its advantage to expand and build an even better product, which could lead to even greater market share gains in the future.
How Booking Holdings is using its advantage to supercharge its growth
In his 2016 letter to shareholders, Amazon's founder Jeff Bezos said it's always Day 1 at his company. He explained:
Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.
Booking Holdings is taking a similar Day 1 attitude. It's spending heavily to improve its travel network -- expanding into rentals, attractions, restaurants, flights, and payments -- in order to offer what it calls the "connected trip." That's the idea of someone using Booking.com (or one of its other properties) exclusively to book an entire trip and everything around it. And it can service that person throughout the trip, providing a better customer experience.
Booking's spending has cut into its operating margin over the last few years, but it has nonetheless maintained higher margins than other travel companies over that time despite huge increases in its marketing and personnel expenses.
BKNG operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Booking creates a flywheel effect where it brings in more traffic, learns more about what consumers want, and improves the experience to cater to customer's needs. The end result is improving sales and successful expansion into new verticals. That might sound familiar to anyone who has followed Amazon.
The stock is trading at a fair price
As Booking builds its Amazon-esque advantage in the online travel space, it's not too late for investors to get in on the stock.
Shares trade for a reasonable valuation of less than 18 times its 2024 consensus earnings estimate. That's a lower valuation than the S&P 500 while providing strong growth prospects for the future.
As Booking scales up, it should see operating leverage from its massive up-front investments over the last few years to expand the business. And if it continues to follow the Amazon playbook, it could find even more growth opportunities to invest in, taking more and more share of the travel market.
