Jalpa Bhoolia & Zimele Mbanjwa
Booking Holdings - I can show you the world
Booking Holdings is a leading provider of online travel and related services, operating in more than 220 countries through five primary consumer-facing brands namely: Booking.com, Priceline, Agoda, KAYAK and OpenTable, as well as through a network of subsidiary brands including Rocketmiles, Fareharbor, HotelsCombined, Cheapflights and Momondo. The company derives revenue through three segments - Merchant, Agency and Advertising and Other.
Merchant revenue is generated from facilitated payments made at the time of booking. In a merchant model, the consumer pays the final price to the online travel agency. This includes travel reservation commissions and transaction net revenues, credit card processing rebates and customer processing fees, as well as ancillary fees, including travel-related insurance revenues. Merchant revenue predominantly stems from Booking.com's accommodation reservations.
Agency revenues are generated from transactions for which the company does not facilitate the payments. In an agency model the consumer pays the hotel directly, who in turn pays the agreed-upon commission to the online travel agency. This consists almost entirely of travel reservation commissions from reservation services. Substantially, all agency revenue is from Booking.com's accommodation reservations.
Advertising and Other revenues are derived primarily from referrals sent by KAYAK to other online travel service providers as well as for advertising placements on its platforms. Revenue earned by OpenTable for its restaurant reservation services and subscription fees for restaurant management services also contribute to this operating segment.
Model and margins
Booking trends pre-and-post 2020 have notably changed for the company. Before 2020, Agency bookings accounted for over 65% of total revenue, being as high as 77% in 2017. It accounted for only 44% of revenue in 2023. Meanwhile, the Merchant segment accounted for 19% of revenue share in 2016, but 51% in 2023. Merchant gross bookings have been increasing at a faster rate than agency bookings (FY23: +52% vs +5%). A reason for this could be that travellers prefer to make payments through a trusted booking platform and to have a one-stop-shop for making and paying for bookings.
This has had a negative impact on margins. Operating profit was 9% higher in 2023 than in 2019, but the margin was 27% versus 35% in 2019. Merchant transactions are inherently lower margin than agency transactions, additionally, merchant transaction costs have increased as a result of the continued improvement in travel demand trends.
The tourism and travel landscape
According to the first UNWTO World Tourism Barometer of 2024, international tourism ended 2023 at 88% of pre-pandemic levels, and is well on track to return to pre-pandemic levels in 2024. According to the barometer, the Middle East is the only region that has surpassed 2019 levels. There is still significant room for recovery across Asia, while travel from the United States is expected to be backed by strength in the greenback, and Europe should continue to benefit from intra-regional demand and travel from the United States.
Booking Holdings noted that since early 2020, accommodation trends have been mostly positive relative to 2019 (pre-Covid 19) led by a notable increase in consumer demand for travel. In 2022, global room nights were 52% higher than in 2021 and 6% higher than in 2019, driven primarily by Europe, Asia, and Rest of World. In 2023, global room nights increased 17% as China recovered following a late exit from lock-down restrictions and strong travel demand in Europe. The post-pandemic recovery of Chinese travel is indeed set to remain at the forefront of the global tourism industry growth. Recent insights from the Chinese Ministry of Culture and Tourism showed that domestic tourism trips surged 34% y/y during the 2024 Chinese New Year holidays and was 19% above 2019 levels. International travel trends are also booming in the region, though still below pre-pandemic levels.
Oxford economics estimates that outbound Chinese travels in 2024 will be almost twice as many as in 2023, with the Middle East being the main destination region.
According to a 2023 report from the the World Travel & Tourism Council, the ten-year growth forecast on the travel and tourism sector is on track to outpace global growth at a rate of 5.8% annually. Technology continues to play a pivotal role in shaping the sector - online platforms such as Instagram and TikTok are often used for travel inspiration, primarily concentrated among Generation Z and leisure tourists. As such, we can expect this to be one of the main driving forces of travel recovery and indeed longer-term growth.
Heavy baggage: Competition
Airbnb made its debut in 2007, while other market players at the time turned a blind eye on the short-term rental property market. Airbnb has since become the pioneer of the vacation rental property model and has since reshaped the way we travel, being particularly favourable among cash-strapped travellers. Expedia entered the vacation rental sector in 2015 through its acquisition of HomeAway (now known as Vrbo), although the company still has a long way to go to square up with Airbnb. Booking Holdings rental business (alternative accommodation) is predominantly in Europe and is slightly different to that of Airbnb as it focuses on renting out homes, apartments, bed and breakfasts, hostels, and other alternative and traditional accommodations properties. Nevertheless, the group continues to invest in this space and explore potential opportunities to drive growth.
Booking Holdings growth strategy
Over the long term, the company intends to continue investing in marketing and promotion, technology, and personnel, to improve long-term operating results, even if those expenditures create pressure on operating margins. In recent years, the investments in initiatives to drive future growth added pressure on operating margins. Notably, Booking.com's merchant gateway, which facilitates payments from travellers through the use of payment cards and other payment methods on the website, has attracted substantial merchant related expenses which have, in turn, affected margins. Nevertheless, this is part of the group's strategy to increase payment optionality to its consumers and travel services providers, whilst providing best-in-class user experience with intuitive, easy-to-use online platforms that aim to exceed the expectations of online consumers.
Another long-term growth lever is the "Connected Trip" vision, which aims to see the group offer a differentiated and bespoke online travel planning, booking, payment, and in-trip experience for each trip. This will be further supported by the 'Genius' loyalty programme that provides value to travellers and partners across all trips. Booking Holdings expects this initiative to bring revenue growth but notes that operating margins may continue being negatively affected by some lower margin non-accommodation services as the business grows.
The company will broaden the scope of its business, which includes exploring strategic alternatives such as acquisitions.
Financial Performance
Booking delivered strong results in 1Q24:
The outlook was less optimistic:
Investment case summary
Risks
Consensus considerations
Valuation
Booking Holdings is trading on 20.0 times forward PE, still below its longer-term average rating. The company trades at a premium to its peers but we believe this is justified given its comprehensive business model, scale, and market share.
