Online travel platform Booking Holdings (BKNG 0.53%) may seem like a business past its prime to some. However, the company is smashing financial records and its shareholders couldn't be happier. Over the past year, shares of Booking Holdings are up 59%, outpacing the 16% gain for the S&P 500. Moreover, the stock has even hit a new all-time high in 2023.
Here's what's driving the outperformance for Booking stock, and what investors can expect going forward.
Why Booking stock is beating the market
To explain why Booking stock is hitting fresh highs, look no further than the company's earnings per share (EPS). As the chart below shows, on a trailing-12-month basis, its profits have never been higher.
Booking's record profitability starts with robust demand. CEO Glenn Fogel began his prepared comments in the second quarter of 2023 by noting the company's record quarterly gross bookings of $39.7 billion. Moreover, it seems the high travel demand is ongoing. Fogel also said, "We are currently preparing for what we expect to be a record summer travel season in the third quarter."
When travelers use services from Booking to book a flight, rent a car, reserve a hotel, and more, these services are paid for upfront. The dollar value of transactions is known as bookings. But Booking doesn't get all of that money. The percentage it keeps for itself is recognized as revenue.
Booking hasn't even had to work too hard for the strong demand it's seeing. In the first half of 2023, its total revenue was up 32% from the comparable period of 2022. By comparison, marketing expenses were only up by 15%.
When revenue increases faster than expenses, better profitability results, as is the case with Booking.
One final consideration here is that Booking's EPS is also up because its total number of shares outstanding is down. The company spent $5.2 billion in the first half of the year repurchasing shares, helping boost its EPS to record highs.
Can Booking stock beat the market from here?
There are two things on Booking's side. The first is an under-appreciated trend beneath the surface. The second relates to artificial intelligence (AI).
Beneath the surface, Booking is investing in its own payments platform. It's handling more and more of its bookings. In the second quarter of 2022, 38% of gross bookings were through Booking's payments platform. In Q2, that was up to 48%.
When customers book using Booking's payment platform, the company holds on to that cash until the traveler checks in. That's good because interest rates are higher than they've been in over a decade.
Considering it's holding on to more customer funds than ever before, Booking is actually making more money from cash than it's paying in interest on its debt. This is the first time that's happened for Booking.
BKNG Net Interest Income (TTM) data by YCharts
This is a swing in Booking's favor by hundreds of millions of dollars. If it can process even more customer transactions with its payments platform, customer funds (known as deferred merchant bookings) should keep going up and help the company earn even more passively.
Management believes that AI will allow it to process more customer payments than ever before. One of the ways Booking does this is by bundling services together and having people pay on the platform, rather than sending them out to third-party websites. The company has been working on what it calls the "Connected Trip," where everything is rolled into one. And advancements in AI can push it further.
Basically, Booking wants to be a personalized online travel agent at scale. It would be cost-prohibitive to have a real person tailoring travel for the masses. But AI could do it. The company has invested in AI for years and it believes it's finally getting close to an inflection point regarding its implementation.
This is a material development for investors in Booking stock and one to watch in coming quarters. If the AI strategy is working, you would expect the company's payment platform to keep growing. This would not only help the top line, but it would boost the bottom line as well. And that could help further this stock on its market-beating journey.
