Online travel agency Booking Holdings (NASDAQ:BKNG) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 29.4% year on year to $6.05 billion. Booking made a GAAP profit of $1.66 billion, improving on its profit of $769 million, in the same quarter last year.
Booking (BKNG) Q3 FY2022 Highlights:
- Revenue: $6.05 billion vs analyst estimates of $5.91 billion (2.25% beat)
- EPS (non-GAAP): $53.03 vs analyst estimates of $49.85 (6.37% beat)
- Free cash flow was negative $95 million, down from positive free cash flow of $2.59 billion in previous quarter
- Room Nights Booked: 240 million, up 57 million year on year
Formerly known as The Priceline Group, Booking Holdings (NASDAQ: BKNG) is the world’s largest online travel agency.
Its businesses span the range of travel offers including Booking.com, Rentalcars.com, Priceline, Agoda (Asia Pacific focused OTA), Kayak (price comparison site), and Opentable (restaurant reservations).
For consumers, Booking Holdings simplifies planning travel, by aggregating supply of hotels, flights, and experiences and using its scale and rewards programs to offer the best prices, while for suppliers, Booking delivers the largest audience of travel shoppers online.
Historically, Booking has held its largest market share in Europe, specifically in hotels, while it has long sought to take market share from market leader Expedia in North America. In 2015 it acquired HomeAway to build up an alternative accommodations business to compete with AirBnB.
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition. Because of the enormous number of flights, hotels, and accommodations available, travel is a natural fit for marketplaces that aggregate suppliers, simplifying the shopping process for consumers. Phocuswright estimated that the annual global travel market will reach $1.4 trillion of bookings in 2022 and online travel platforms today make up over 50% of the industry’s bookings, a percentage that has been rising for 20 years, and will likely continue in the years ahead. Covid lockdowns in 2020 halted global travel for months on end, and may have fundamentally reduced the market for business travel, a long term threat for the profitability of online travel platforms.
Booking Holdings (NASDAQ:BKNG) competes with a range of online travel companies such as Expedia (NASDAQ:EXPE), Airbnb (NASDAQ:ABNB), TripAdvisor (NASDAQ:TRIP), Trivago (NASDAQ:TRIV) and Alphabet (NASDAQ: GOOG.L).
Booking's revenue growth over the last three years has been very strong, averaging 38.7% annually.
This quarter, Booking beat analyst estimates and reported solid 29.4% year on year revenue growth.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 18.7% over the next twelve months.
As an online travel company, Booking generates revenue growth by a combination of increasing the number of stays (or experiences) booked, as well as the level of commission charged on those bookings.
Over the last two years the number of Booking's nights booked, a key usage metric for the company, grew 88.8% annually to 240 million users. This is among the fastest growth of any consumer internet company, indicating that users are excited about the offering.
In Q3 the company added 57 million nights booked, translating to a 31.1% growth year on year.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Booking it measures revenue per each of the nights booked, a function of the cost of the service and the commission Booking's charges.
Booking’s ARPU growth has been almost flat over the last two years, averaging 0.57% quarterly. The ability to maintain ARPU while growing its user base shows the stable value of Booking’s platform. This quarter, ARPU shrank 1.31% year on year, settling in at $25.21 for each of the nights booked.
User Acquisition Efficiency
Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Booking grow by a combination of product virality, paid advertisement or incentives.
It is very expensive for Booking to acquire new users, with the company spending 60.1% of its gross profit on marketing over the last year. This low level of sales and marketing efficiency indicates a highly competitive environment, with little differentiation between Booking and its peers.
Earnings & Free Cash Flow
Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.
Booking reported EBITDA of $2.65 billion this quarter, which was a 43.9% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 28%.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Booking burned through $95 million in Q3, with cash flow turning negative year on year.
Booking has generated $4.26 billion in free cash flow over the last twelve months, an impressive 26.6% of revenues. This robust FCF margin is a result of Booking asset lite business model and scale advantages and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Booking's Q3 Results
Sporting a market capitalization of $75 billion, more than $9.13 billion in cash and with positive free cash flow over the last twelve months, we're confident that Booking has the resources it needs to pursue a high growth business strategy.
We enjoyed seeing Booking’s strong user growth this quarter. And we were also glad to see good revenue growth. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 5.46% on the results and currently trades at $1,870 per share.
Is Now The Time?
When considering Booking, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Booking is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been impressive, over the last three years. And while its ARPU has been stagnating, the good news is its user growth has been strong, and its impressive EBITDA margins show massive profitability of the business.
At the moment Booking trades at next twelve months EV/EBITDA 11.9x. There are definitely things to like about Booking and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.
The Wall St analysts covering the company had a one year price target of $2,331.3 per share right before these results, implying that they saw upside in buying Booking even in the short term.
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