Booking Holdings Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Booking Holdings Inc. is a world leader in online travel and related services, with a diversified portfolio that spans accommodations, flights, rental cars, and experiences.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Booking Holdings, formerly known as Priceline, operates a business based on connecting travelers with a wide network of suppliers, including hotel chains, independent accommodations, airlines, car rentals, and other travel services, primarily through its online platforms. The value created by Booking comes from the two-sided network model, connecting both supply and demand of travel opportunities, thus generating valuable commissions.

Business Overview

Revenue Distribution

BKNG generates revenues primarily through two main streams: agency revenues and merchant revenues. Agency revenues are derived from transactions where the company acts as an intermediary, facilitating bookings and collecting commissions from its partners—mainly hotels. The company does not take ownership of the inventory or directly influence prices, rather acts as a conduit between the customer and the partner. Merchant revenues, in contrast, arise when BKNG acts as the merchant of record, selling accommodations directly to the consumer under a merchant agreement, and therefore it controls the price point of these accommodations.

These revenue streams can differ considerably based on geographic location, for example in areas like Europe, agency revenues are very predominant, while in countries with higher hotel saturation or a lower degree of digital adoption, merchant revenues are more common.

Beyond these core streams, Booking also makes some revenue through advertising, which is shown under Agency and Other Revenues. There is also the Other Category revenue, which is a smaller contributor, but it still makes significant revenue with the likes of tours, experiences, and other travel service-related profits.

The online travel industry has gone through a major transformation over the past two decades. From the early days of aggregators to the current landscape dominated by booking giants such as Booking and Expedia, the market has matured considerably and has continued growing. Mobile adoption, digital marketing, and increased globalization have been major trends affecting the sector. Competition is fierce among the established players, yet new entrants keep trying to compete. The value proposition for travelers is shifting-it’s not about price alone but also convenience, the ability to get a plethora of choice, speed, and personalization. New players are trying to capitalize on these changes. Artificial intelligence and other technologies have the potential to become the next big disrupters to the industry in the future. The travel industry is generally cyclical, and while the COVID era provided some of the most dramatic and unprecedented declines in the sector’s history, it has since recovered, albeit with some long-lasting changes, such as the increase in vacation rentals, and the rise of remote work which also affects corporate travel.

Margins and Profitability

As can be seen from the recent 10-Q fillings and earnings calls, Booking maintains respectable levels of profitability despite competitive pressures. Net income and earnings per share (EPS) figures can vary wildly each quarter, but operating margins often range above 20%, reflecting the scalability of the business model and the ability of the company to control its costs. This is primarily because they generate profits off a high booking volume and through leveraging established systems. Booking can also influence higher profitability with strategic pricing tactics. The company has increased its efforts into AI investments, which are expected to help with efficiency and reduce costs in the long-run. While Booking is mostly known for its hotel booking business, they have invested heavily in other sectors such as flights, attractions, experiences, rental cars etc which they also plan to capture profits from.

Competitive Landscape

The online travel industry is a fiercely competitive environment. Booking Holdings faces a range of competitors, which can be grouped into three broad categories: the main player in the US, Expedia, which operates its own suite of travel platforms, as well as other players that offer airline bookings, and so on. The second is Google, with its Google Travel platform, which also offers hotel bookings and such. Third, there are smaller regional players, such as large hotel chains with their booking sites, as well as newer upstarts that have innovative solutions. The low barrier to entry into the space is also a key factor for the high competition. Many of the businesses compete on price and commissions, but also by enhancing the user experience through a wide set of add-ons, such as tour guides, concierge services, loyalty programs, and so on. While Booking has a large moat built around its established businesses, the potential for new technologies to disrupt them does exist and must be watched closely.

What Makes Booking Different?

Booking Holdings distinguishes itself through a very large global presence, and through its extensive relationships with a vast network of hotel suppliers and accommodations around the globe. This is its main moat. The company’s brands are among the most well known in the market. This makes the company a vital partner to travel suppliers, giving it access to a huge inventory, and a very critical link for travelers around the globe. It also leverages its large data repositories to give travelers personalized offers and recommendations, thereby solidifying its position in the market as a unique, vital player. This moat, though, is not indestructible.

Financials

Booking has reported significant growth in revenue and profitability in its recent reports. For Q3 2023, the company reported a 27% growth in revenue to 7.3 Billion, a net income of $2.36 billion, and an operating profit of $2.67 billion. Q4 2023 also showed strong growth in revenues, up 17.7% year-over-year, showing that the company has recovered from the pandemic and is going strong. They had around $18 billion in cash as of end 2023. They have a solid revenue growth rate, strong margins, very large asset base, and low-to-moderate debt, making them one of the better-performing travel sector companies. The company has been increasing its revenue streams and cutting costs where they can. There is a considerable investment in marketing, technology, and new acquisitions. The company plans to allocate capital based on strategic priorities and to grow the moat further.

Moat Assessment

Booking’s primary competitive advantage is a result of its established network effects in its booking sites. The network effects moat is very hard to replicate since a competitor needs to have just as large an inventory, and a just as well-known brand to compete, as the more traffic it has, the more valuable their services are to customers, thus attracting more traffic. However, these moats are neither eternal nor impenetrable: The company is seeing the challenge from other companies such as Google, which is offering a more seamless booking experience. Also, the company is subject to macroeconomic and geopolitical instability, causing slowdowns in travel.

Due to the fact that the business does have a solid moat, but faces significant competition and new technological developments that may erode its advantage, we rate the company a 3 out of 5 in terms of moat. It has significant durability, but the market itself is subject to change.

Legitimate Risks

Like every business, Booking is exposed to certain risk factors which could affect its performance, some of them are:

  • Macroeconomic Factors and Geopolitical Risks: The global economy can affect travel demand, as evidenced in the last few years with COVID. Recessions, trade conflicts, and other such factors can reduce the demand for travel and thereby affect the company’s revenues.
  • Increased Competition: As mentioned, new players entering the markets could take away market share, especially when such firms offer better or innovative booking services.
  • Technological Disruption: There is always a chance that new technologies can create new companies, products, or systems that disrupt how the travel market operates. AI, for example, could be a tool for competition or for generating new bookings.
  • Regulatory Changes: Laws and regulations in each country also affect the business environment, and changes to such can affect profitability.
  • Foreign Currency Fluctuations: Booking receives revenue in many currencies, and fluctuations of these can affect overall revenues.
  • Customer Loyalty: If customers are not loyal, the company will have a hard time to maintain revenues as customers can quickly shift to another booking company offering better prices or services.
  • Cybersecurity and Data Breaches: As a company that handles a lot of private data and payment information, it is under constant risk of data breaches which can cause considerable financial as well as reputational damage.
  • Dependence on Third-Party Relationships: The company derives significant revenue through various suppliers such as hotels and car rentals, any disruption to those relationships may create issues for the company.

Despite these risks, Booking’s business is generally quite resilient. Their global reach, their deep relationships, brand recognition, and technological advantage, allows them to withstand many forms of external shocks. They have also proven in the past to be highly resilient to many economic shocks.

Understandability

While the company’s business model might seem relatively simple on the surface level, with connecting travelers to travel services, its actual business is a large and complicated set of operations. The company operates a lot of software and platforms to achieve this task, while also managing many international relationships and compliance issues. The different revenue streams based on its various business lines and areas, and the use of complex financial and legal structures, mean that it can be quite challenging for a layperson to understand everything that the company is doing, and how it is doing.

Due to these complex financial mechanisms, and a very large global operation, we rate the understandability of the business as a 2 out of 5.

Balance Sheet Health

The company has a good cash balance, limited debt, and maintains positive levels of profitability. They have also proven to be resilient to many external shocks and economic challenges. While the company is not completely immune to a decline, and is sensitive to many global macroeconomic forces that can hurt revenues and margins, it overall presents a fairly strong financial position.

Based on the above, we rate the company a 4 out of 5 in terms of balance sheet health.