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Booking Holdings Stock: Promising Developments, but Risks Remain
Stock Analysis & Ideas

Booking Holdings Stock: Promising Developments, but Risks Remain

Booking Holdings (BKNG) provides travel and restaurant online reservation and related services worldwide. The company operates through its six primary consumer-facing brands, including Booking.com, Priceline, Agoda, Rentalcars.com, KAYAK, and OpenTable.

The COVID-19 pandemic has had a profound impact on Booking’s business, with international travel restrictions adversely impacting the travel industry. Despite that, the company’s CAPEX-light business model and a modest recovery in the industry have allowed the company to return to profitability as of its latest quarter.

In my view, the company remains an industry leader, set to see its results improve dramatically once the ongoing pandemic fully eases. That said, investors need to be wary of the stock’s valuation, which seems to have priced in such a recovery already despite challenges persisting.

For this reason, I remain neutral on the stock for now. (See Analysts’ Top Stocks on TipRanks).

Q3 Results

Booking reported its Q3 results earlier in November, posting a 77% year-over-year gross booking growth to reach $23.7 billion. Revenues also grew 77% versus the prior-year period to $4.68 billion, beating consensus estimates by $390.million. Adjusted EBITDA came in at $2.1 billion, which made for a great EBITDA margin recovery.

Booking is making progress with its bundling initiative, which seems to have the potential to further power growth. In Q3, the company achieved a 131% growth in air tickets booked through the platform compared to Q3 2019 (i.e., its pre-pandemic results). Therefore, users are becoming increasingly more likely to utilize Booking’s platforms not just just for their accommodations but potentially their flights and car rentals.

The company’s cross-selling potential could become more powerful over time through its recent, key acquisitions. Subsequent to the quarter end, Booking entered into an agreement to acquire Getaroom for $1.2 billion.

Through this acquisition, the company plans to develop a new Strategic Partnerships business unit that will enhance B2B distribution for hotel partners while contributing a robust accommodations technology stack for affiliate partners. Hence, Getaroom should increase value for both hotel and affiliate partners.

Days later, Booking announced that KAYAK was set to expand its hotel portfolio internationally, while around a week ago, Booking entered another agreement to acquire Etraveli Group for approximately €1.63 billion. Etraveli is already a partner of Booking.com, and the acquisition should empower its existing flight product and complement Booking Holdings’ continuous effort to create frictionless global flights offerings.

Valuation

While Booking’s expert management team should be able to unlock fruitful operating efficiencies and value through its recent acquisitions, and the ongoing recovery in the travel industry should continue boosting the company’s results in the medium term, the stock’s valuation seems rather rich.

The stock trades at a forward P/E of around 21.4 based on its FY 2022 EPS estimate of $100. However, this also assumes that revenues will grow by 44% next year, which would take a significant recovery.

With the pandemic persisting, and the recent discovery of the omicron variant, these estimates are perhaps too optimistic. Moderna (MRNA) CEO Stéphane Bancel just recently predicted that existing vaccines will struggle with omicron, while several countries have already tightened their traveling policies.

Hence, a swift recovery seems to be priced in the current valuation, which might not materialize — at least not as soon as the current estimates indicate.

Wall Street’s Take

Turning to Wall Street, Booking Holdings has a Moderate Buy consensus rating, based on 11 Buys and 10 Holds assigned in the past three months. At $2,826.50, the average Booking Holdings price target implies 32.1% upside potential, nonetheless.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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