Is Booking Holdings Stock Undervalued?

There is a lot of humdrum in the market about whether the post-pandemic travel boom is finally fading after rewarding the industry for almost two years. Looking at the share price performance of Booking Holdings Inc. (NASDAQ:BKNG), it seems clear that the travel boom shows no signs of fading.

It operates as one of the largest online travel booking companies and has seen a lot of traction among investors in the last year where it rose by 42%. Over the past three years, the stock has gained close to 145%. By comparison, the broad SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained about 24% in the past 12 months.

Booking’s price tag is notoriously high, but given its performance, does it make sense to buy? Can it still be undervalued now? 

So, Is the Travel Boom Fading or Not?

After the pandemic receded, wanderlust came back with a vengeance. It was somewhat paradoxical to see consumers return to travel because they were facing inflationary pressures, which were eating away at their pocketbooks. Nevertheless, international travel reached 90% of the pre-pandemic level in 2023, while ticket prices in some cases also increased by double-digit percentages.

This year, there are indications that a slowdown might finally materialize in the travel industry but this may well simply be a sign of normalization rather than a blatant slowdown. 

A McKinsey survey found that traveling is very important for young people (Millennials and GenZers spend more out of their income on travel than older generations). Younger people are more likely to travel abroad, although a bulk of travel spending is on domestic destinations (the U.S. is the largest domestic travel market).

Is Booking Holdings Undervalued?

Trading at 32x earnings and with just 5.7% upside to analysts consensus price target of $5,238 per share, Booking Holdings does not appear to be undervalued at this time.

In fact, the valuation is a bit stretched if we compare it to its industry peers. It is trading at 28.62 times forward earnings on a non-GAAP basis. 

The company’s stock might be ripe for a split, though. The last time the company split its stock was when it enacted a reverse stock split in 2003, following a slew of complaints over customer service issues. It was not something to be excited about, and the Board of Directors has not authorized any splits since then, even though the price tag is not exactly affordable to many retail investors.

Stock splits don’t lower the market valuation of the companies and are increasingly becoming less popular among U.S. firms due to the rise of fractional trading.

Still, they can be perceived as an instrument to make the stock more affordable to a broader base of investors and drive up demand. Bookings Holdings’ CEO Glenn Fogel is not opposed to the idea of a stock split, but neither is he excited about the prospect of cutting the share price.

How Are Bookings Holdings Performing Financially?

When management has last reported Booking’s third quarterly results some bullish tailwinds were evident.

First of all, the company recorded just short of 300 million room nights in the quarter, a key metric that revealed solid 8% year-over-year growth. The global room night growth was driven by Europe, with stable growth in the U.S. and double-digit growth in Asia.

As a result, total revenues grew by 9% from the prior year’s period to $7.99 billion. In addition, both room nights and revenues topped the high-end of management’s own forecasts.

This top line growth was accompanied by disciplined marketing spend and lower-than-expected fixed opex growth, which resulted in adjusted EBITDA climbing above expectations by 12% year-over-year to $3.67 billion.

Turning to the cash flow statement, Bookings Holdings is a cash-generating giant. Free cash flow for the nine months ended September 30 stood at $7.25 billion, growing by 26% from the year-ago value. As a result, liquidity is not a concern for the company at this time. On the other hand, the cash balance was a little down because some capital was returned to investors in the form of dividends and share repurchases.

What Should You Do with Booking Holdings Now?

There it lots to like about Booking Holdings for long-term investors, not least the past history of relatively muted volatility which allows for a relatively easy hold. Gross margins are high and sit at a remarkable 89.1% but the good news is largely priced in at this time.

Earnings multiples both past and future are high and the PEG ratio of 11.1x suggests the company is overvalued relative to future growth rates.

Among analysts, the outlook is fairly neutral with modest upside forecasted on the horizon so it’s not the most compelling reward to risk opportunity now for those with a shorter-term outlook.

Still, the committed investors willing to be patient should be rewarded by the persistent profitability and high cash flows.

If there’s one key metric to focus on for those willing to sit on the stock for a sustained period of time it’s the debt levels that are somewhat elevated but not overly concerning at the same time.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.