Here’s Why Booking Holdings Stock Is Overpriced At $2400 Levels

Booking Holdings’ stock (NASDAQ: BKNG), the world’s largest online travel agency that offers services from lodging to airline tickets to car rentals, has more than doubled from the March 2020 lows of around $1177 (when broader markets made a bottom due to the spread of Covid-19) to $2422 currently. In fact, the company’s stock is now 22% higher than its pre-pandemic high of roughly $1990 (Feb 2020). Now, are further gains likely for BKNG? We think that the company remains overvalued at a price-to-sales ratio of 14x, and could likely see a downward correction based on its historical multiples in the long term. The fact of the matter is that leisure travel shall return at some point, but business travel has a very tough road ahead as virtual collaboration tools have never been cheaper or more easily accessible. Needless to say, growing competitive threats such as Airbnb, coupled with a heavy debt load of close to $12 billion, could result in Booking Holdings’ stock price declining in the longer term. 

That said, we also believe that the stock could see a modest upside from the current levels in the near term, riding on the optimism of the vaccine rollouts. On the Q4 earnings call, the company mentioned that bookings in Israel, which has vaccinated more than half of its people, are now up more than double-digits from 2019 levels. All this indicates a likely travel rebound in other markets as well, as more people get vaccinated.

Booking Holdings stock has underperformed the broader markets between fiscal 2018 and now. The company’s stock is around 40% higher than it was at the end of fiscal 2018, compared to 54% growth in the S&P. Our dashboard, What Factors Drove 40% Change in Booking Holdings Stock Between Fiscal 2018 and Now? provides the key numbers behind our thinking, and we explain more below.

Booking Holdings’ revenues declined a massive 53% from $14.5 billion in 2018 to $6.8 billion in 2020. In addition, revenue per share (RPS) growth was lower by 45%. BKNG’s P/S was around 6x during the 2018-2019 period. It appeared higher in 2020 as the reported drop in RPS led the P/S ratio to appear higher at that point. The company’s P/S ratio grew from about 5.6x at the end of FY 2018 to 13.3x at the end of FY 2020. While the company’s P/S is about 14x now, it could potentially see a downside closer to its historical levels.

How Is Coronavirus Impacting Booking Holdings Stock?

The travel sector was beaten down in 2020 as the onset of the pandemic led people to stop traveling, forcing travel companies such as BKNG to close global offices and eliminate a quarter of their workforce. As evident, Booking Holdings’ revenues declined a major 55% year-over-year (y-o-y) in 2020. In addition, profits were also down a whopping 99%. The business continued to plunge in the fourth quarter, due to various lockdown restrictions in major parts of the world. The company’s revenue was down 63% from year-ago quarter levels in Q4 to $1.24 billion. To add to this, the company’s room nights booked fell 60% y-o-y, leading to a 65% y-o-y decline in travel bookings to $7.3 billion. However, Booking Holdings was able to limit its adjusted net loss of 57 cents per share (which was better than analysts’ consensus expectation for a loss of $4.28 per share), as it scaled back sharply on marketing spending in Q4. It should be noted that roughly half of BKNG’s expenses come from sales and marketing. The company has a high variable cost, which makes it easier for it to conserve cash in difficult economic times. In 2020, the company reported $14.9 billion in cash and investments and a loss of $200 million in free cash flow. 

Going by our Booking Holding’s Valuation, with a revenue per share (RPS) estimate of around $236 and P/S multiple of just over 10x in fiscal 2021, this translates into a price of $2446 in the near term, which is marginally higher than the current market price.

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