Why Has Booking Holdings’ Stock Remained Level Since 2017 Despite Strong Revenue Growth?

Booking Holdings (NASDAQ: BKNG) stock has largely traded sideways since early 2017 despite the company reporting revenue growth of nearly 20% since 2016. Trefis analyzed the operational performance of Booking Holdings over recent years to understand the reasons for this inconsistency, and determined that the company’s stock has been hurt by the steady decline in its net income margin over the years. Fierce competition in the industry coupled with a shrinking net income margin have also weighed on Booking Holdings’ P/E multiple. We estimate Booking Holdings’ Valuation to be $1,943 per share, which is in line with the current market price.

A Quick Look at Booking Holdings’ Revenues

Booking Holdings’ reported $14.5 billion in Total Revenues for full-year 2018. The company generates its revenues through three sources: Agency Bookings, Merchant Bookings, and Advertising.

• Agency Revenues: $10.4 billion in FY2018 (72% of Total Revenues). These are commissions received for travel-related transactions where the company does not receive booking payments.
• Merchant Revenues: $2.9 billion in FY2018 (20% of Total Revenues). These are commissions received for travel-related transactions where the company receives booking payments.
• Advertising Revenues: $1.0 billion in FY2018 (8% of Total Revenues). These are revenues earned from referrals, advertising placements, and subscription fees.

Booking Holdings’ Revenues Have Witnessed Strong Growth Over Recent Years

• Booking Holdings’ total revenues have grown at a CAGR of 19% since 2016.
• The growth has been strongest for advertising and agency segments, whereas merchant revenues slowed in 2018.
• Moreover, gross bookings observed a growth of 20% and 14% in 2017 and 2018, respectively.

But The Adjusted Net Income Margin Figure Has Been Under Pressure

• Notably, Booking Holdings GAAP Net Income has swelled from $2.1 billion in 2016 to $4.0 in 2018
• However, the company recognizes various income and expenditure sources as one-time or non-cash events and therefore reports non-GAAP earnings as a profitability measure
• The increase in Net Income looks considerably lower after adjusting for non-cash and one-time expenses
• In fact the Non-GAAP net income margin for Booking Holdings has shown a steady downward trend – falling from 31.8% in 2016 to 30.6% in 2018. And we expect the figure to shrink further to 30.2% in 2019
• The Adjusted (Non-GAAP) Net Income Margin figure has been under pressure despite gains from lower tax rates due to rapid growth in performance marketing, brand marketing, and personnel compensation, which together contribute 75% of the company’s total expenses

Margin Pressure, Coupled With Increasing Competition Has Led To Lower P/E Multiples For The Company

Considering Booking Holdings’ stock price after its yearly earnings release in February, we have estimated trailing P/E ratios together with the non-GAAP earnings. As we highlight in Booking Holdings’ Valuation dashboard, the P/E ratio has fallen consistently since 2016 – shrinking from 27 in 2016 to 20.6 in 2018.

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