Can Booking Holdings Reach Pre-Covid Levels After A 55% Rally?

After a 55% rise since the March lows of this year, at the current price of around $1800 per share (as of July 15th), we believe Booking Holdings stock (NASDAQ: BKNG) has reached its near term potential. The world’s largest online travel agency has seen its stock underperform through the coronavirus crisis, as the travel industry was worst hit during the pandemic. Booking Holdings stock declined by a slight 2% year-to-date, compared to flat growth in the S&P. Although Booking Holdings stock recently spiked on broad optimism regarding a potential coronavirus vaccine, it is still a long way until any vaccine reaches the public and the world returns to normalcy. Booking Holdings stock is about 3.5% higher than it was at the end of 2017, a little over 2 years ago. Our dashboard, What Factors Drove 3.5% Growth in Booking Holdings Stock Between 2017 and Now? provides the key numbers behind our thinking, and we explain more below.

Booking Holdings’ revenues grew 19% from $12.7 billion in 2017 to $15.1 billion in 2019. In addition, earnings growth, on a GAAP basis, was higher by a solid 136%. This was driven by a 75% growth in net margins from 18.5% to 32.3% and a 12% decline in shares outstanding during this period. However, GAAP growth can largely be attributed to non-cash and one-time expenses. It should be noted that the company’s earnings growth, on a non-GAAP basis, was up by only 33% between 2017 and 2019. In fact, the Non-GAAP net income margin for Booking Holdings has shown a downward trend – dropping from 30.9% in 2017 to 29.6% in 2019. These margins have 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.

Booking Holdings’ P/E ratio declined from about 36x at the end of 2017 to 18x at the end of 2019. This drop can be associated with competitive pressure from Google and the rise of Airbnb, in an already maturing travel market. Also, investors realized the adjusted earnings growth to be much lower from GAAP earnings, which partly explains the decline in its P/E multiple. This figure further declined to current 16x levels, which remains 13% lower than the levels of 18x seen in 2019. We believe that the stock could likely refrain from having a meaningful increase in P/E in the near term, and could remain rangebound around the current levels.

So how has Coronavirus impacted the stock?

Booking Holdings’ gross travel bookings (the value of services booked, net of cancellations, including for Booking.com, Priceline.com, Agoda, and KAYAK) got cut 50% year-over-year in the recent Q1. Consequently, the company’s revenue fell 19% y-o-y and profits declined sharply during this period. In fact, the consensus is estimating an overall 50% decline in revenue for full-year 2020. However, it should be noted that online travel agencies (OTA) are still in a better position than other travel businesses like airlines. This is because they can swiftly scale their advertising budgets according to demand. Marketing is the biggest expense item for such companies, and the OTA’s have been scaling their budget down significantly during the Covid-19 crisis.

Although China is on a recovery road and the U.S. and Europe are in the early stages of opening up, it is still unclear how soon travel will rebound. With options such as work from home and video meetings, people are not looking forward to traveling anytime soon. In the case of leisure travel – people could likely prefer apartments and small-scale B&Bs in the countryside over large hotels, given the hygiene situation due to the pandemic.

While Booking Holdings’ stock may not have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Here’s more on travel stocks: What Factors Drove -60% Change In Tripadvisor’s Stock Between 2018 And Now?

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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