EUR 850.00 For Business Accounts Only

Morningstar | Booking's Near-Term Investments Support a Strengthening Network Advantage; Shares Undervalued

While Booking Holdings reported solid 12% third-quarter bookings growth (versus our 11% estimate) and gave healthy fourth-quarter transaction guidance for a 6%-9% lift (3% forecast), marketing deleveraged 25 basis points to 30.4% of sales (after leveraging an average of 363 basis points the previous three quarters), supporting our stance that these expenses would begin to trend higher after the lapping of efficacy efforts last August.

We plan to lift our $2,200 fair value estimate a mid-single-digit percentage due to slightly higher 2018 sales, while maintaining long-term forecast (roughly 10% annual sales growth over the next 10 years with operating margins approaching 42% in 2027 versus 36% in 2017). While we continue to view Booking as the best positioned travel company, and its shares are trading at a slight discount to our valuation, we view Expedia as the more attractive stock, trading at a larger margin of safety to our $180 valuation.

This quarter's 29% two-year stack bookings growth remained stable with last quarter's 30% level, encouraging after the company saw the metric drop from a mid-40% level in prior quarters. The stabilization came as Europe (estimated at around 50% of total bookings) rebounded from prior weather and World Cup headwinds, and as Booking's merchant business (22% of sales) maintained momentum from facilitating nonhotel accommodation listings. We plan to lift our 12% 2018 booking growth forecast to 14%, while maintaining our out-year forecast of low-double-digit growth over the next few years.

After leveraging marketing expense in 2018 (due to performance channel efficacy), we continue to expect deleveraging in 2019-20, as Booking wisely invests in brand marketing (TV) and growth segments (experiences, alternative accommodations, and emerging markets). Beyond 2020 we still expect Booking will see lower marketing expense as a percent of sales, as it leverages its strengthening network advantage (source of its narrow moat).