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Morningstar | Booking’s 2019 Includes Macro Softness and Investments, Which Support Its Intact Network Advantage

While we still see Booking Holdings' network advantage (source of its narrow moat) as intact, we plan to reduce our $2,270 valuation about a low-single-digit percentage to account for incremental economic weakness and investment spend in 2019. We see shares as undervalued.

Like recent updates from narrow-moat travel operators TripAdvisor and Amadeus, Booking is seeing a sluggish environment in Europe. This was most evident in its two-year stacked constant currency booking growth decelerating to 20% in the first quarter (versus our 19% estimate) from the near-30% lift averaged during 2018. Also, second-quarter year-over-year constant currency booking growth guidance of 4%-6% implies a two-year stack growth deceleration to 16% at the midpoint. As a result, we plan to reduce our 7% booking growth estimate to around 5%, while not making a material change to the roughly 11% average booking lift we forecast for 2020-23.

Marketing expense was 42.1% of total sales, above our 40.1% estimate and the 41.2% reported last year, as Booking ramped its TV spend to 5.7% of total sales, above our 4.1% forecast and the 3.4% reported in the prior-year period. We see higher investment into rentals, experiences, payments, and emerging markets as prudent, and believe it will build upon the company’s leading global awareness and support its network advantage. Still, we plan to lift our 2019 forecast of marketing spend amounting to 34.3% of total revenue toward a 35% level.

The underlying health of Booking’s platform looks intact. We calculate agency take-rate was relatively stable when adjusting for currency and Easter timing, supporting its competitive position remains in good standing. Also, we calculate marketing ROI continued to improve (after adjusting for the same factors) in the quarter, indicating the company is being efficient with spend. Further, Booking again noted that its direct traffic is outpacing paid channels, signaling its network is resonating well with travelers.

Booking continues to make aggressive share repurchases on pullbacks in its stock price. Last quarter, the company commented that it planned to complete the remaining $4.5 billion left in its existing share authorization by the end of 2019. It has already finished those repurchases, buying back $2.7 billion during the first quarter and $1.8 billion since the end of March, which combined represent 5% of total shares outstanding. We see this as a good use of capital given shares have been trading at a discount to our existing $2,270 fair value estimate. Booking Holding’s board has since authorized a new $15 billion share repurchase program, which management anticipates it will complete over the next two to three years.