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Morningstar | Booking’s Outlook Clouded By EU Uncertainty, but Network Advantage Remains Evident

Booking Holdings shares dropped around 10% after hours in reaction to weaker first-quarter booking guidance of down 1% to up 1% versus our 4% growth estimate, resulting from travel hesitation in Europe (we estimate around 50% of total bookings), according to the company. At this juncture, we believe that macro uncertainty in Europe is the reason for Booking's cautious outlook versus a weakening competitive positioning. This view is supported by recent tepid comments on Europe made by Expedia (we estimate around 25% of total bookings). Our stance is also buoyed by Booking's fourth-quarter take-rates and direct channel mix that grew versus prior year, supporting its network advantage (source of its narrow moat). Also, Booking's constant currency two-year stacked bookings growth of 27% in the quarter represented only a slight deceleration from the 30% rate posted in each of the prior two quarters, despite some pullback on performance marketing.

We plan to reduce our 2019 11% sales growth estimate toward 7% to account for macroeconomic uncertainty, which will be largely offset by the time value of money. As a result, we don't expect a meaningful change to our $2,300 valuation. We see the pullback in shares as an opportunity for investors to a build position in a high-quality company, although it might require patience during a more uncertain economic environment period.

Fourth-quarter constant currency bookings grew 13% versus our 13% estimate and guidance of 10%-13%. Importantly, solid bookings growth occurred despite the company easing back on performance marketing channels that led to lower volumes. It is also encouraging that Booking's 14.8% agency take-rate was up from 13.8% in the prior year, while room night growth of 13% exceeded guidance for 9%-12% lift and equated to 30% two-year stack growth (near the low-30% posted in the prior two quarters). Also, direct booking mix has grown to over 50% of the total, signaling improving brand awareness.

Booking is doing well in alternative accommodations, which represented around 20% of total 2018 revenue and continues to grow at a rate above the consolidated average. We continue to see Booking as the number two share leader in the space, behind only narrow-moat Airbnb, and agree with the company's decision to make incremental investments in this industry in 2019. We also agree with Booking's decision to make incremental investments into payment technology, which can help facilitate bookings in experiences and emerging markets and help support the company's network advantage. This decision also harmonizes with our long-held view that Booking would continue to invest into growth areas through 2020 (keeping operating margins at around 36%) before leveraging its network advantage in 2021 (lifting operating margins to over 41% in 2027).