Reservation Holdings Inc. (NASDAQ:BKNG) is probably the only website or app I use to book my hotels. I am a very frequent business traveler and a frequent traveler. From time to time I tried to book directly on the hotel website website to save money, but it wasted a lot of my time, which made it more complicated and in the end, it wasn’t worth it.
Booking.com is the largest online travel agency focusing solely on hotels around the world. He has a massive gap that others can’t easily copy.
It’s a fantastic company that operates on an agency model. It is lightweight and scalable.
The valuation of Booking is high. Compared to its peers in the OTA space, its valuation is among the highest, even compared to the recent addition of Airbnb (ABNB). The high valuation might be warranted as Booking.com enjoys the fruits of its network effects in the hospitality industry. After two years of confinement, people want to travel and explore the world. With high inflation, the desire is muted, so we may be a bit ahead of Booking.com, but this should be on investors’ radar.
The hotel industry and the network effect of reservations
A competitive advantage of scale results from two interrelated matters. First, the size of the firm’s advantage over its competitors, and second, the type of advantage that results from comparative advantage.
When a user like me considers a hotel in a city, it’s a complex decision that includes price, location, amenities, and ease of booking. The hospitality industry is fragmented, and especially in Europe, Asia, Latin America, Africa, and the Middle East, there aren’t the same big players that my friends from the United States frequently use. The United States is concentrated around a few large hotel chains.
When I fly to Croatia, Austria or any other European or Asian country, my platform of choice is, by default, Booking.com. Product/service complexity on the demand side and fixed cost requirements on the supply side are strong moats.
Evidence has shown that more listings on an accommodation services site like Booking.com attract more travelers and lead to higher occupancy rates. This further reinforces the network effects on the demand side for Booking.com.
In conclusion, Booking.com benefits from its global brand and powerful supply-side networking effects. Each new listing increases the relative attractiveness of the business, which in turn attracts more users (like me), making competitive attacks unlikely to succeed.
Like my article on Stanley Black & Decker (SWK), I would like to evaluate Booking.com based on my investment framework. Definitely check out this article; it’s a high-value contrarian opportunity.
Invest in proven companies
Booking.com has a fantastic track record of market growth and expansion. It is a global brand that primarily uses an agency model for hotel bookings. It is not very capital-intensive and benefits from supply-side networking effects.
Invest in companies that operate in sectors that are not likely to change quickly
Booking.com operates a simple business model. It connects users to hotels. The complexity on the demand side provides a gap against new competitors in the industry. A new competitor is expected to operate globally as travelers rarely check their city for hotels. They want to travel elsewhere. Thus, the risk of local competition, as in the case of Uber Technologies (UBER), is low. A new competitor should rack up thousands of offers globally. Booking Holdings Inc.’s platform is simple and provides all the necessary features that users, like me, need.
Booking.com’s services are essential for travelers in the fragmented hospitality industry. Each user has a unique request for a hotel. Some want a great view, some want a hotel with a kitchen, and some are on a tight budget. Payment through the Booking platform provides security for the user and responsibility for the hotels.
The latest industry disruption has been Airbnb. Airbnb has added a whole new layer of offerings to the platform – the sharing industry. Booking.com is slowly making it easier for private offers to enter the platform. Apart from that, the industry is simple and does not change quickly.
Buy struggling companies in struggling industries
Even though Booking.com had tough quarters at the start of the pandemic, its small-cap operating model allowed it to weather those times with bravado.
He is not distressed compared to, say, Stanley Black and Decker. Still, it’s a challenging environment due to rising energy prices, inflation, and consumers’ focus on necessities over luxury travel.
The travel industry has a bleak outlook due to rising energy prices and inflation itself.
Buy companies that have a sustainable competitive advantage or a gap
We touched on this subject at the beginning of this article. Booking Holdings Inc. has a broad and strong moat due to supply-side networking effects and demand-side demand complexity.
Buy companies at a discount to their intrinsic value
This one is tricky because Booking Holdings Inc. does not trade at low valuations. The market knows it’s a fantastic company that keeps its valuation high.
From its pre-pandemic high of $2171 with a price to operating cash flow ratio of 22.39, Booking Holdings Inc. has fallen to $1910 and a P/OFC ratio of 17.83. The short-term outlook is cloudy, making it difficult for the market to gauge the price.
Over the long term, Booking.com has all the conditions for steady growth and is currently trading in the lower valuation range.
Buy low-risk, high-uncertainty companies
Booking Holdings Inc. operates as an OTA in the hospitality industry. While the hospitality industry can be risky, Booking.com is privileged to operate as an agent for hotels. This means that it works with little capital and is scalable worldwide.
Its platform benefits from increasingly attractive supply network effects with each new hotel joining the platform.
The activities of Booking Holdings Inc. are very low risk.
The short-term outlook in the travel industry is not very clear – in the short term, it is associated with great uncertainty. Especially as we approach the winter months, we don’t know how Covid-19 cases will evolve and whether countries will increase travel barriers again.
Booking.com is a low-capital company operating as an online travel agency focusing solely on the hospitality industry.
It enjoys a deep and wide moat due to its globally recognized brand, supply-side networking effects, and demand-side complexity.
Its valuation is high relative to its peers, and the outlook for the travel industry is murky at best. In the short term, industry investors may struggle, but in the long term, Booking.com will persist and continue to offer its platform to users like me.
I put the stock on my “eagle eye” watch list. To add it to my low volatility portfolio, I first need to find a suitable company that I want to delete. You’ll know when I add it by checking out my template portfolio on Google Sheets.
I always welcome constructive criticism and open discussion. Feel free to comment or PM me about my calculations and/or the sources I use in my articles.