Travel and reservation agency giant Booking (NYSE:BKNG) stock was downgraded at Telsey in mid-March on concerns regarding competition. Specifically, Telsey warned that rising competition from both Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Airbnb in an already stiffly competitive booking market were reasons to move to the sidelines on the stock. Consequently, Telsey slapped a Market Perform rating on BKNG stock, with an $1,800 price target, implying limited upside over the next twelve months.
This downgrade makes sense, for the most part. Booking.com faces some big challenges on the competition front. Alphabet and Airbnb are just two of many, many competitors which look positioned to take share from Booking’s suite of travel and reservation platforms over the next several years. Also, growth at Booking is already slowing, and margins appear largely maxed out.
As such, there are reasons to be worried about BKNG stock over the next several years.
But, I’m not sure I’d stay on the sidelines with this name. The stock is pretty cheap. Indeed, it’s cheap enough to reasonably make the argument that shares are already priced for bad news. Going forward, it won’t be all bad news. Yes, competition is rising. Yes, growth is slowing. But, there are also still very big secular tailwinds at play here which should keep Booking’s revenues and profits on a healthy uptrend.
If so, BKNG stock should rise from here, meaning it’s time to get cautiously bullish, not move to the sidelines.
The Fundamentals Are Good Enough for BKNG Stock
Broadly speaking, the fundamentals underlying BKNG stock are good enough.
Sure, there are a handful of negatives at play here. Namely, when you look at Booking’s suite of platforms (Booking.com, KAYAK, Priceline, Agoda, Rentalcars.com, and OpenTable), you get this feeling that those are yesterday’s favoring booking platforms. Today, it seems a lot of people are using Google for flights and hotels, while Turo and other sharing apps are the new hot things in the car rental market. Meanwhile, Airbnb is still taking share in the accommodations market. That’s largely bad news for BKNG stock, too.
You also have continued competition from the likes of Expedia (NYSE:EXPE), Hotels.com, and many others.
Overall, there are a bunch of current and new competition in the bookings industry, the sum of which will gradually take share from Booking’s suite of platforms.
Having said that, this share erosion won’t kill the Booking growth narrative. The whole bookings industry is growing by leaps and bounds, thanks to multiple secular tailwinds. First, you have the big experience economy shift wherein consumers globally are valuing experiences (eating out, traveling, staying at cool hotels, etc.) over products. Second, there are global urbanization and digitization trends at play around the world which are likewise increasing the size of the global bookings market.
As such, Booking can afford to lose market share in the global bookings market, yet still grow at a “good enough” pace to keep investors happy. That’s exactly what will happen over the next several years. Market growth tailwinds will offset share erosion headwinds, and Booking’s revenue and profit growth will remain on a healthy uptrend.
The Stock Is Cheap Enough
The bull thesis on BKNG stock centers around the fact the stock isn’t priced for good enough growth. It’s priced for worse. But, good enough growth is exactly what will happen, and as such, the stock has healthy upside potential from here.
Breaking that down, BKNG stock trades at just 17-times forward earnings today. That is a multi-year low valuation, and about 15% below the stock’s five-average forward multiple of 20. BKNG stock is also trading at a significantly below-average trailing sales multiple, trailing EBITDA multiple, and trailing cash flow multiple.
Meanwhile, revenue growth is running in the high-single-digit to low-double-digit range. Margins are largely stable. Buybacks are happening. Assuming this growth profile largely persists over the next several years, Booking projects as a double-digit profit grower for the foreseeable future.
Under conservative modeling assumptions (slowing revenue growth, slight margin expansion, and relatively muted buybacks), I think this company can do about $170 in EPS by fiscal 2025. The market doesn’t seem to want to pay 20 forward earnings for this name anymore. But, a market average 16 forward multiple seems too conservative given the secular tailwinds. Splitting the difference, an 18 forward multiple at scale seems reasonable.
Based on an 18x forward multiple, a reasonable fiscal 2024 price target for BKNG stock is around $3,060. Discounted back by 10% per year, that equates to a fiscal 2019 price target of $1,900. That implies nearly 10% upside over the next several months.
Bottom Line on BKNG Stock
Booking Holdings will face some serious competitive challenges over the next several years, the sum of which will create share erosion headwinds for the company. But, those share erosion headwinds will be largely offset by bookings market growth tailwinds. This offset will allow revenues and profits to stay on a healthy uptrend. So long as this persists, BKNG stock has room to rally from today’s relatively depressed valuation.
As of this writing, Luke Lango was long GOOG.
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