Chit Chat Stocks - Booking Holdings Stock Report (Ticker: BKNG)

Episode Date: February 7, 2024

On this episode of Chit Chat Stocks, Ryan goes through his research on Booking Holdings and why he is attracted to the stock (listen to the full episode to see if he is buying shares!). We discuss: - Why Booking Holdings became the largest travel company in the world - What are their new initiatives? How do they plan to grow? - Competing with Airbnb and Expedia - A "frenemy" relationship with Google - Valuation analysis ***************************************************** Subscribe to our YouTube channel: ⁠https://www.youtube.com/@ChitChatMoney/featured⁠  Follow us on Twitter/X: ⁠https://twitter.com/chitchatmoney⁠  Follow us on Substack: ⁠https://chitchatmoney.substack.com/⁠  ********************************************************************* ⁠Options are not suitable for all investors and carry significant risk.  Certain complex options strategies carry additional risk. Options can be risky and are not suitable for all investors. See the ⁠Characteristics and Risks of Standardized Options⁠ to learn more. For each options transaction, Public Investing shares 50% of their order flow revenue as a rebate to help reduce your trading costs. This rebate will be displayed as a negative number in the “Additional Fees” column of your Trade Confirmation Statement and will be immediately reflected in the total dollars paid or received for the transaction. Order flow rebates are only issued for options trades and not for transactions involving other assets, including equities. For more information, refer to the ⁠Fee Schedule⁠. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See ⁠public.com/#disclosures-main⁠ for more information. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 25% off any premium plan: ⁠https://finchat.io/chitchat/?lmref=J3bklw  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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found in the podcast description. High yield cash accounts are available for U.S. members only. Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome in to Chit Chat Stocks. That is right. We have officially changed our name to Chit Chat Stocks, Chit Chat Money, RIP, four one out. It is no longer our name. We are going with Chit Chat stocks going forward. And today is our Wednesday stock research episodes. It is similar if you're

a longtime listener to the not so deep dives, but we're trying to freshen things up, mix it up, hopefully keep it fresh for the listeners. As always, my name is Brett Schaefer and I'm joined by Ryan Henderson. Today we are covering booking holdings and this is one. So two weeks back, I think it'll be two weeks back. I did a report on hims and hers. Go listen to that if you're interested in that company. And this time, Ryan has done the research and I'm going to be the one interviewing him about it, asking discussion questions. So the way these formats go is Ryan has done all the research for the last couple of weeks on booking holdings. He's going to present what he's found, what he thinks, what he thinks about the management team, what he thinks about

the business. I'm going to have some discussion questions, maybe some just questions in general, follow-up, and then we're going to conclude with, is Ryan buying Booking Holdings? I guess we don't want to say that until the end so people keep listening. But before we get into it, remember, we have changed the name. I already talked about that. If you enjoy these episodes, if you got value out of these episodes, give us a review on Spotify or Apple Podcasts. That is the best way to support the show. And if you want the show notes, charts, and graphics that Ryan is using during this episode, subscribe to our newsletter, also called Chit Chat Stocks. Link for that will be in the show notes, or you can search it on Substack. Okay. Ryan, we're talking booking

holdings. We're going to get into what they do, but before we get into it, how much did you know about this company before you started researching them? Not a lot. It's a platform. I don't think any of their platforms I've ever used in my life. And that's okay. I think a lot of Americans are actually probably in the same boat. It's a name like the name booking.com, the name kayak, the name Priceline. These are brands that I'm sure people have heard of because they do so much marketing, but I can honestly say I've never booked an accommodation with any of the platforms. So I did not know a lot about the business. So when I found that Booking Holdings is the largest travel company in the world, I was pretty shocked, but I was very impressed with the

business. And I think it's one that I'm surprised I haven't seen more people research given that it's so large and seems to have some big advantages, which we'll talk about in a second. All right. So what is Booking Holdings? What brands do they own? What do listeners need to understand about this? So as I mentioned, if you're an American, you might not be that familiar with them, but Booking Holdings is the largest travel company in the world. They operate through six brands, Booking.com, Priceline, Agoda, which Agoda's, I'm going to use the word online travel agent or OTA a couple of times. They're an OTA that is pretty popular in Asia.

And then rentalcars.com, Kayak, and OpenTable. I'm going to use the term booking pretty interchangeably between booking.com and bookingholdings because booking.com accounts for roughly 90% of their profits. I think a couple of years ago, it was like 87% of booking volume, like the gross booking volume. So this business is essentially booking.com. That's why they changed their name from Priceline Group to Booking Holdings, I think in 2017. So just think of it as booking.com. But to understand the business in its simplest form, I'm going to go through basically the booking.com network from both sides of things. So booking.com is essentially a marketplace of

accommodations and there's other stuff as well. So you'll see like airplanes or sorry, flights, what's their, they don't call it experiences, they call it attractions. And then there's rental cars, stuff like that. But it's really, for the most part, hotels, boutique, like big hotels, boutique hotels, kind of bed, bed and breakfast, and then what they call alternative accommodations, which you can think of that as more of the Airbnb style. And so those are, it's a massive marketplace of all sorts of accommodations on its platform. Users go there to book stays. The user can typically choose to either pay for the stay right then and there. So let's say you're looking, I'll be the, actually Brett, let's use you here.

You are in Cartagena right now, not to oust you in case there's any disgruntled listeners, but you are in Cartagena and let's say you wanted to book a hotel for a hostel or something for Cartagena. You'd go to the platform, you'd find one you like, or you could go to Google and look it up and it'll direct you to booking.com. And you find one you like, you can typically either choose to pay right then and there, which will give you probably a discount, or you can reserve a spot, but pay at the place at the time of your stay. And so it's important to understand that second part there where you can defer the payment to when you actually stay there, because that is why they've become the largest travel company in the world. So when you do that, there's two

kind of mechanics here. When you reserve a spot on Booking's platform, but you don't pay until you go to the hotel, the hotel passes a kickback or passes a commission through to Booking.com. This is what they call agency revenue. So there's three different types of revenue generators for them. There's agency, merchant, and advertising. Agency revenue is when they get commissions back from the hotel. Merchant revenue is when the customer actually books it at the time that they're reserving it. So that's when booking will hold the cash, they'll have a take rate, and then they'll pay the hotel once the stay is completed. So that's merchant revenue. And that's kind of the more traditional model. Think Airbnb,

Expedia, it's more the typical route. And then the last one is just advertising and other revenue. This is, I mentioned that they have a number of properties. So companies like Kayak, That's more meta search. It's basically like a directory where they are directing you to other travel websites. They don't actually have any travel inventory or accommodation inventory on their platform. They're not an OTA. So they get paid on a per click as opposed to a per stay basis. And it's really kind of a small piece of the pie, but I guess it's just important to understand when you start looking at this 10K, knowing kind of how the different revenue drivers are built. Am I confusing there? Does everything make sense? It makes sense. I think listeners can understand that. I've used booking once or twice, and I did find it interesting the first time that you didn't have to pay until you got there because I've been used to the, as the United States, booking hotel or Expedia, Airbnb, stuff like that. One follow-up I have, you have a nice chart here from our friends at FinChat.

I use the link in the show notes to get 25% off. The merchant revenue has grown as a percentage of revenue substantially since 2020. Do you know why that is? Maybe they're discounting it more, like discounting the pay in advance thing. And so it's interesting because I was thinking about writing some sort of an article called your working capital advantage is my opportunity, like the story of booking, because for the longest time it was, we're not going to take the cash out front. We'll just get our commission on the backend. And that's what drove such increased supply.

And I'm going to talk about that here in a second, but now it's starting to balance out. Merchant revenue is really starting to grow. So it seems like they are pushing that a little more, which makes sense because if you're booking.com and let's say you're a guest and you're booking a stay for six months in advance, booking.com, if you start to push like the discount or something like that, or try to incentivize them to pay at the time of reservation, now rates are significantly higher. You can use that cash. You can earn on treasuries in the meantime, whereas probably wasn't that useful around 2020. So that might be part of it. And then 2020, I think was a bit of an anomaly just because there was a lot of cancellations and stuff like that. So it distorted

the revenue composition, but really merchant revenue has been growing pretty quickly, but it's pretty balanced between agency revenue and merchant revenue, which just means about 50% of the time people choose to pay at the at the time of the actual stay and then about 50 of the time people choose to pay in advance so kind of a even split right now yeah and it's nice with the customer value proposition because you can cancel i guess it's a little bit unfortunate maybe for the merchant or the hotel because people can have that flexibility to cancel but yeah it's a give intake okay next section stock history this is a dot-com bubble stock but one that has recovered say similar to the ebays of the world except a little bit more successful than them

how did they become the biggest travel company in the world clearly it wasn't an super innovative idea to say hey we're gonna sell this stuff online why have they won and why are they so large why is there's so little competition out there yeah so in the late 1990s there were a lot of businesses like this a lot of companies that were trying to tackle the online travel space and one of those companies was priceline.com priceline was launched in 1997 by jay walker kind of funny name jay walker but anyway the uh and it took off really quick because they had this it was a bidding strategy that was very novel at the time called name your own price strategy it's not really used that much anymore but it was you were able to essentially just put in your own price and i

remember the commercials yeah the commercials yeah i think so just with the with those actors doing crazy stuff and they would say they have like this gun and they would say name your own price tool or something like that do you remember that yeah i think i'm i think i might be thinking of like a progress i feel like progressive had progressive has that too yeah i can't remember exactly but sorry not relevant to this episode continue anyway so it took off really quickly and they were using it for airline tickets hotel rooms car rentals and they started to move into a bunch of other stuff too like groceries and kind of it was the dot com so it was you know think big Um, but in 1999, so two years after it was founded, Priceline went public at a $13 billion

valuation. That is the highest first day value in history up to that point, I believe. And that's what, you know, they had all that money, which to be honest, if they didn't get all that money from the IPO, I'm not sure they would be who they are today because they, they did struggle a bit throughout 2000. They had to cut off some of their other ventures. The CEO resigned in 2000, and then in 2001, they did become profitable. So they were profitable in 2001, kind of similar to an Amazon story in that way where it was

really well-funded to IPO, kind of gave them enough runway to get to profitability. And then coming out of it, there were a lot of internet travel companies that were struggling because they lost funding and all that. So Priceline began acquiring a lot of them. And then in 2005, I'm not sure this was one of the businesses that was really struggling, but they acquired Booking.com. I think it was called Booking.nl or something like that. It was founded in the Netherlands, and that's really where it was popular. And they became really popular prior to the acquisition and then after the acquisition with hotels across Europe, thanks to that agency model. So we talked about it, how it was kind of a novel concept at the time to let people pay at the actual stay instead of forcing them to pay in advance.

Expedia was really the popular brand at the time, but they stuck with their working capital advantage where people paid in advance and they could earn interest in the meantime. And booking.com kind of saw it as, okay, we're going to get all the hotels. We're going to get all the room supply on our platform because it's almost like an affiliate program for hotels, right? It's zero cost to put your inventory on booking.com, but you're potentially giving a commission, uh, after the fact. So once the stay is done, so it's, you're not kind of risking anything there. Anyways, it really helped. That's what allowed them to have a lot of success, particularly in Europe. That's where they were from, but that's Expedia was still pretty popular.

So they are for context right now, Expedia is about three times larger than booking.com in the US. However, booking.com is four times larger than Expedia in Europe, which is huge. That is a big deal. And I've got a quote here to explain why an online travel agency is so much more valuable in Europe than it is in the US. So it says, in the US, over two thirds of hotels belong to one of the major chains. Whereas in Europe, this dynamic is reversed with roughly two thirds of hotels remaining independent. Franchised hotels benefit from the brand and marketing prowess of their deep-pocketed corporate partners. Independents, by contrast, have none of these resources so can receive considerable value by signing up with a large online travel agency.

There's a lot more value to being an OTA in Europe when there's all these independent hotels that need you because they don't have the money to invest in the tech stack and staff and stuff like that. Whereas if you're a Marriott or a Hilton or a Hyatt and you're popular in the US and you have tons of these hundred room buildings, you have all the resources in the world to actually own that relationship with your customers. You've got rewards programs and places they can stay anywhere in the country. That's just not really how it works in Europe. And so it's why Booking.com grew in popularity and attracted so many hotels initially. And then having all that hotel supply ultimately attracted the users and started to build up

that two-sided marketplace. So anyways, Booking.com has $146 billion in gross bookings over the last 12 months. Expedia, $103 billion in gross bookings. So you think fairly similar in terms of booking size. Booking.com or Booking Holdings, 40% larger, but Booking Holdings market cap is six times as large as Expedia that hopefully illustrates the value of operating primarily in Europe and having a lot of your business there. So what is that because they just have a larger take rate or there's better margins, better unit economics? Why is there that difference? Because I can't

I believe that the earnings ratio would be six times different. I guess I don't have the specific numbers in front of me, but I would imagine it has to be a take rate that you're getting. Because if you're the Hiltons or the Hyatts, you can give Expedia your hotel supply or your room supply, but it's not as valuable because you own the direct relationship a lot of time. Whereas if you're booking.com, you're generating a lot of the leads for these independent boutique hotels. So probably willing to pay a lot more if you are the boutique hotels instead of one of the major chains. And then on top of it, just better operating efficiency as well, it seems like.

So there's that. And we'll talk a little bit about that in terms of management's approach. But yeah, very valuable. They carved out a very valuable market. But Booking.com is the vast majority of the business today. Kayak, Priceline, they've all kind of, they do okay. They don't really talk that much about it, and they don't break out the specific growth of each segment.

But that's the basics of the business. I would just essentially think of it as this is an online, this is the online travel agency in Europe. Okay, so yeah, we have a Europe-centric approach. booking.com most important, but clearly they've still been growing and they have a lot of say ideas, projects, ways to grow fighting Airbnb, fighting Google. We'll talk about each of those later. You know, I have a sneak peek at Ryan's notes, so I'm not totally surprised at what he's going to talk about, but what are their growth initiatives? How are they trying to grow their

gbv gross booking value from here so i mean a lot of the growth is just from the fact that online like booking your travel online is still growing pretty quickly and it's actually not there's still a lot of travel that's booked not over the otas not over the internet which is kind of surprising to me i just don't i would think how else do you do it but the older people maybe they have real travel agents and maybe they go through them. So I guess that makes sense. So there is an industry tailwind here, but they're also trying to expand beyond the accommodation segment. They want to be a complete travel company. That means helping people find not only hotels, but flights, rental cars, places to eat, and attractions. So they're

trying to tie all that into one app. So if you go to booking.com, you're going to see across the top There's like a top bar of different toggles, and there's stays, flights, flights plus hotels, car rentals, cruises, attractions, airport taxis. You can click on any of those, and they're trying to integrate all of that into a single service. I don't know if any of these have done – it doesn't seem like any of them have done particularly well. They have rentalcars.com, and it's kind of – I think it's done okay. Frankly, their disclosures are a little vague around some of these. i see shareholders as myself and buy out turo that'd be kind of that'd be kind of nice i think but well we can get that in a second because so the it looks like they've done a decent job

growing their flights business although part of that was through acquisition i believe they made an acquisition in 2020 and it's kind of taken off since then um i can share my screen or maybe Brett, you can show your screen and show this chart. On FinChat, they track airline tickets sold and it's gone from 2 million roughly tickets sold in end of 2019 to 9 million. That's per quarter. So they've done a pretty good job growing that business. However, it's kind of similar to the hotel industry in the US where a lot of markets, a lot of geographies have one, two, three, or four major carriers that own that relationship with their customers. And maybe they've got credit card programs or something like that, that have the tie-in. So

having that directory or having that OTA for travel or for flights, it's not a huge deal. And it's not going to be as profitable. That's for sure. Before we move on, we want to talk about our friends at FinChat.io. FinChat.io is the complete stock research platform for fundamental investors beyond having all the standard financial data for companies around the globe they also have company specific segments and kpis on over 1500 stocks so if you want to see amazon's aws revenue over the last 10 years or you want to track match groups paying users maybe you're curious how many stores sprouts farmers market added last quarter bin chat tracks all those kpis and literally half a million more we know that if you're a fundamental

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Yes. And remember from our Ryanair episode, there has been delayed compared to the United States, but consolidation in european airlines as well where the ceo founder i think it's the founder of ryanair oh no not the founder but the guy that's been running it for a long time said that there will probably be ryanair is a low-cost airline maybe another and then there'll be a couple large premium ones leftanza british airways stuff like that so that same thing could happen in europe as well and yeah i agree with you that booking.com especially with those relationships I would say as well, and this is just a reminder because their earnings were today, something like American Express or the companies that do something similar like Chase, they have a pretty decent foothold, especially with their partnership with places like Delta, where you can buy directly through their apps, earn those extra points and have that vertically integrated relationship. why would i as an american consumer as an american express card holder go to

booking for flights i don't really get it but they did okay it seems yeah some people do and a lot of it is just that when you start your journey as a guest wanting to travel somewhere and glenn fogel the ceo talks about this you typically start with the place you're actually going to stay. So you book your accommodation first, then you go and find flights. And being the connector there and saying, oh, okay, you found your accommodation with us, check out our flight options. I do think it's a decent upsell or a logical next step for them. However, they tried to acquire a company in this space this year, and it was blocked by the UK Competition and Markets Authority. So it looks like they're going to be facing some headwinds

with acquisitions, which for a company that's been a serial acquirer, keep in mind, booking.com itself was an acquisition that could potentially be a difficulty or be a headwind for them. Last thing I'll talk about here, really, this is going to be the story of travel growing and online travel growing as well. There are some things they can do to kind of boost their take rate on travel, but it's hard to know what's really going to stick. So the accommodations, maybe that can work.

The rental cars, maybe there's something there, but they're not going to be that substantial for this business. One thing they did do pretty well is they implemented their own payment system. This is just one part of the transaction where they can take out a supplier and become their own supplier in that

And just over half of their gross bookings were processed through their own payments platform last quarter. So these are just like little tweaks that can provide incremental revenue to them. But once again, it seems like if you're betting that they're going to move into the airline ticket space and it's going to be this huge value driver, it just doesn't really seem realistic. 90% of the bookings that are done on this platform are accommodations. Now, I might be jumping the gun, so tell me if we should just wait until another section, but the alternative accommodations, the competition with Airbnb, do you have any thoughts on how successful they've been in adding those to the platform, or should we save that for another section? Let's save that for this next bit, because I'm going to talk about Airbnb in general and how the two compare. They have talked a lot about alternative accommodations. They say alternative accommodations account for like, I think it's around 30% of bookings on their platform, but their definition for alternative accommodations might be a little different and may have changed over the years. So we can kind of address that in a little bit. And it's one of my big risks. So we'll get to that in a second. All right. Well, let's get into competition. If you're booking holdings, who are you worried about? Do they have an ability to defend their position in the marketplace? Yeah, let's start with the competitive advantages. And really, I think it pretty much boils down to one competitive advantage, and that is scale. So at this point, they now have so many accommodations on their platform that for consumers, it's a very convenient place to go. You know you're going to find tons of different hotel rooms, boutiques, bed and breakfast, whatever you need, especially if you are in Europe.

Then on the flip side, given all the consumers that are on the platform, you really have to be on there if you're a boutique hotel or something like that or an independent accommodation based in one of their big markets. So it's that two-sided network effect that continues to compound. And there's actually this quote from one of their competitors. It's the CEO of Ctrip, which is China's largest online travel agency. He says, booking.com is a global brand. And in hotels, they're just so far ahead of anybody else. I think it will be very difficult for anybody to come close to them. I think it's pretty rare that a competitor, the CEO of a competitor says something like

that. So it's kind of a testament to the massive network and two-sided marketplace that they've built that really drives pretty much the business. I mean, it's a competitive advantage at this point that makes it very difficult for anyone to compete with them, except Airbnb, who's gone about it kind of a different way. And so when I think about competition, there are pretty much two big players that compete with them, Airbnb and Expedia. Some people see Google as a threat, but that risk hasn't really materialized.

So I'm going to start with the direct competitors. Expedia, we've already talked a bit about them, but I think they're in the most difficult position of all the otas they are large in the u.s but hotels tend to hold direct relationships with their customers so the value prop isn't quite as high they do own vrbo but i don't know the economics on vrbo i i don't know how profitable that business is and it seems like they're kind of getting their lunch eaten eaten by uh it was doing so well they would yeah if it was doing so well they would share a lot more of those metrics, the KPIs from Vrbo,

and they would make it so confusing, I think. So to pause there, do you think Expedia is at the largest risk of ceding share or from consumer spend to the DTC apps from Marriott and Hilton to Airbnb and to booking? I don't know. I don't know.

Coming up prior to COVID, Expedia and Booking Holdings were both growing their gross booking volume at a pretty healthy clip, but both of them were doing really well. However, coming out of COVID, it's been very different. Booking has basically recovered entirely and Expedia really hasn't. So it seems like there's been a bit of a sea change in terms of share. Part of that might be the fact that Airbnb has done so well in the U S where Expedia is main market is. And so, yeah,

but isn't Airbnb is biggest city Paris. So maybe if I was Expedia, if I was asking them, I would say, well, isn't Airbnb giant in Europe and booking still doing well there. Yeah. I don't know.

I'm not sure what it is. And the thing that's kind of unique here is that Airbnb, as much as they've taken share of the consumer wallets, they still go after kind of a different customer and keep in mind the customer here is not the guests it's the accommodations because the guests are basically the product in this case you're selling them to the hotels and so airbnb they're going after the individual property owner which seems to be pretty different than the kind of listings booking gets even in the alternative accommodations, you see a lot of condo buildings. The building operators list some of their empty

condos on Booking's platform. Whereas Airbnb, it seems like whatever, it's the couch surfing or someone's house, empty room, that kind of thing. So I'm not exactly sure what to think of it because this is to me, Airbnb is the biggest risk. I don't know why Expedia has just consistently seeded share over the years. Seems like booking.com has really, they garnered the supply with hotels first and they basically just had a marketplace advantage over Expedia globally. But Glenn Fogel, the CEO of Booking Holdings was asked about his competition with Airbnb. And I think he kind of gave a cop out answer here, which it sounded a bit like an excuse. He said, look, Brian and his team have done a great job. What I really admire though, and this is kind of a backhanded compliment

was his chutzpah is one way to put it because in many of the places that he did business, it was illegal. And so he's basically saying like, I didn't do it because it was illegal, but he did it. So kudos to him. And I don't know, it feels like an excuse. i kind of i kind of shrug my shoulders because booking.com and airbnb have both grown their booking volumes at a pretty steady clip over the last seven to ten years so it doesn't really feel like it's a winner take all market yeah i agree and i am showing a chart right here right now here for the listeners or excuse me the viewers on the old youtube or i guess on spotify as well uh we got let's see since 20

what do you have since 2012 here ryan or i guess airbnb might the kpi might not go back as far booking 16 and a half airbnb 32 expedia 10 but remember that booking was starting in a larger base so what do we got here for airbnb 71 booking has gone 146 yeah since 2015 which is as far as airbnb's numbers go back booking.com has gone from 55 million in gross bookings to a little under 150 billion airbnb has gone from 8 billion to 71 billion so significantly higher growth rate than Booking, and both have grown quicker than Expedia. I would say probably within the next couple of years, you could expect Airbnb to have more bookings than Expedia.

Yeah, and Booking Holdings has grown nominally. The absolute value that they've added in dollar volume has been higher than Airbnb, I think. Doing the math there, if anyone wants to check out those nice charts, go to fin chat dot or yeah fin chat dot io slash chit chat get that discount link is in the show notes all right you mentioned google people have talked about them why you you have a note here that you wouldn't worry about google why is that even though i'm booking my flights all the time or checking google flights searching hotels blank city in europe on google why why is it not a

concern it's important to it's important to emphasize that you are not booking through google you are price comparing for the most part i believe but i don't think i know anyone that really books through or even if they have the option but this has been talked about as a risk for the better part of the last decade and it really hasn't amounted to much and the concern is that google themselves will disintermediate booking's model and become an online travel agent themselves. That hasn't happened. I think there's a few reasons why. So number one, Google is basically a directory. And like you said, I look up flights to New York or whatever, and I do it on Google. They will direct you to the places to book those flights.

And that is very profitable for them. In fact, in 2017, Skift, which is kind of like a travel industry magazine website type of thing. They estimated that Google has generated $14 billion in travel advertising. It's obviously grown since, I would guess, given that all the platforms have grown substantially themselves. That would actually have made Google the largest travel company in the world. Now, they don't really get categorized as a travel company, but they would have been. And it would actually make booking.com one of, if not the largest customer for Google in terms of ad dollars. And everyone thinks Google, massive business, how big could it really be? I'm talking about potentially mid single digit percentage of Google's ad revenue. So

they really are, first of all, they would be jeopardizing a big chunk of their business if they chose to be the OTA and potentially lost the ad dollars from Booking.com. Booking and Expedia, they'd be losing a ton of their ad dollars. So not sure Google wants to do that, but I've got an example here in terms of what Google provides as the intermediary. So I looked up, what was it? Hotels in Florence. And you find a hotel on Google's little map thing.

And then the first thing that comes up is you've got a list of the online travel agencies that people can go to that have some sort of room inventory from that hotel. And Booking.com is the first one here. They're sponsored in this case, so they're paying for that premium kind of real estate. And it's valuable real estate for them because they're paying a commission to Google, but it's a high value transaction for booking as well. The second one, the second reason, so I don't think they want to jeopardize that relationship. That's the first reason. Second one, being an online travel agency does require a little more than just being a good tech platform.

And if you go to Expedia or booking, I think you'll see a lot of job listings for like relationship managers, people that are like area managers where they actually have real in-person relationships with the hotels, with some of the suppliers on their website. I don't think Google really wants to do that. That's not their core competency. It just feels like it's kind of outside of their realm of expertise. So that one's a little soft in terms of why they wouldn't want to do it. But if they really wanted to do this, I think they would have done it a long time ago. I think they'd see that this is a cash flowing machine for them and they don't want to ruin that and it would not be a core competency of theirs to go out and get

all these hotels it's a win-win you're saying yeah and then the third one this one is has grown as kind of a deterrent here but 51 of gross bookings or i think it's room nights booked on Booking's platform come from their mobile app. So in those instances, which is more than half, Google isn't an intermediary at all. And I think that's really kind of insulated them a bit, not only from competition, but from having to pay out this tax or royalty to Google. And they actually talked about this on the last conference call. They're like, we had better than expected margins because we didn't need to do as much marketing. So much of this so much of our bookings now are coming directly from our app that we're generating

the roi we want with less money so it feels like a huge uh a huge element to kind of the thesis here of bookings growth in the future having it not only be a direct relationship with the customers but it's higher margin if it's done through the app as well so yeah i feel like this could be the number one part of the story here possibly being underrated by investors although i'm sure you know some of the smart analysts have clearly looked at this data does this make them okay here's a couple questions here do you think that it can continue to just climb higher over time what what are they like doing about that and does it mean that they can get to airbnb level margins and do you think that it not only serves as a margin expander but a moat

expander well i'm not sure they'll get to the free cash flow margins of i guess they could it kind of depends how much airbnb spends but given that so much of the revenue comes from the agency model where they're not actually like the accounts payable isn't the size of airbnbs where Airbnb has elevated free cashflow margins because they hold the cash for so much longer than- Let's just say, ignore that, EBIT, EBIT margins. I think they're there now. And it's, yeah, I think this will help be,

it'll be margin accretive. This, I believe this time last year, So Q3 2022, they had 45% of their gross bookings from the mobile app. So it went from 45% to 51% in a single year. It's growing really quickly for them, and they've done a really good job, I think, pushing that to their customers. So yeah, I expect this to continue to grow. Glenn Fogel said something at one point.

He's like, a lot of the big trips are still booked on desktop. for some reason there's kind of a barrier in people's minds that they don't want to do they don't want to book the big trips over their phone i'm not sure what it is but maybe that'll slowly kind of subside over the years and it'll trickle into mobile mobile bookings for uh booking holdings but not sure right now it's kind of a bit of hurdle for some people to get through and until you've done it until you've booked a big trip on your phone I could see why it's like

you want to do it on the desktop or whatever but it's just habit it's just habit but definitely younger people more in tune with using the phone versus the desktop that's just kind of the generational divide sorry I got to sneeze here for anyone watching

but I think it's going away next question management what do you think what are your thoughts on this proxy statement So the CEO is Glenn Fogel. He took over in 2017, and he's actually the CEO of Booking Holdings and Booking.com, which are technically two separate things. And he's been with the company since 2000. So I've been there for going on 25 years now. He owns $71 million worth of stock. We're going to get a new proxy statement here in a little bit, but he gets paid a lot in options. So $71 million worth of stock, it's a decent amount to keep him incentivized, but it looks like he must be selling a good chunk of stock as well because, and I didn't go through all the form fours for him, but I would assume he sold a lot because he's been paid more in options than he currently owns.

So anyways, expect him to continue to do that. It's not really a red flag if you see him continuing to sell stock. We'll talk about his compensation in a second. But as for my actual thoughts on Fogel, I don't really have a strong opinion either way. I think he's the right guy for booking, which is different than what the right guy for Airbnb would be. So if a large organization, there are other companies inside booking holdings beside booking.com. You have to do a good job, I think, incentivizing all the different management teams. You have to be a good spokesperson for the company.

He has a good mindset around capital allocation, and I think he invests resources where they're needed, but I personally rate a guy like Brian Chesky higher. It's more, I think, a situation of ownership where Chesky is the founder. He owns a ton of the stock. if he wants change to happen he can move a lot quicker than booking can and i would be surprised if fogel is that like in the weeds in terms of product where it seems like chetsky is pretty much i don't know if he's the only guy coming up with some of these ideas but it seems like they just push whatever new idea he has to the platform pretty quickly and they innovate fast it's a

sleeker design. In terms of the actual user experience, I would say Airbnb is winning. And you can just go to the booking website. It's a little bit messy. It's not quite as clean as Airbnb, but we'll talk more about that in a second. As for the proxy, I thought it was okay. There are four named executives on the proxy and they all make relatively small base salaries. So less than a million dollars. However, they made $155 million in total between 2021 and 2022 from bonuses, most of that going to Fogel. 75% of their bonus compensation comes from performance stock units. This used to be all of their compensation, but when COVID hit and no one was going to hit their performance units, they didn't want a bunch of executives that didn't get paid because

frankly, you'd probably lose them. So I think it made sense to convert 25% of their compensation to just, I believe it's RSUs instead of PSUs. So they're getting some level of guaranteed pay. But here are what the performance stock units are based on. It's five different criteria. First one is revenue. They were targeting 35% to 40% growth. This is for 2022. Keep in mind, not terrible. The second one, and I think I like this, it's compensation EBITDA. So it sounds bad, but this is adjusted EBITDA and they've actually made further adjustments that are actually pretty shareholder friendly. So the compensation EBITDA is impacted by stock-based compensation expenses. So they do deduct those, which means we've seen that before where you're getting paid on adjusted

EBITDA, and it just further incentivizes more stock payouts. They deduct those. That's not included. That's shareholder-friendly. Second one, it excludes results of acquisitions that were not incorporated into the targets set at the outset of awards to prevent buying results. We see that a lot as well. Companies that try to make acquisitions to hit their performance hurdles, they back out those. Third one, it excludes the impact of foreign exchange rates. Now, typically, I'd be like, well, that's a cost of doing business. But this actually, foreign exchange rates benefits booking because they're converting it to U.S. dollars when they earn in typically either the euro or the pound. They have been lately, so they back that out.

Yeah, I guess it's something they can't control, but who knows? Maybe the U.S. dollar will devalue. I think it's out of their control, so it's probably good to normalize from that. But it's not like they put this in when they were getting hurt by it or something like that. It's something that they continue to have. And the fourth one, they treat all CapEx as expenses. So all those I think are pretty shareholder friendly. They use compensation EBITDA. But the other one, don't really love this, but they use relative stockholder return, which it's their return versus travel and tourism peers. But a lot of these companies are like CapEx intensive, like actual travel companies, big hotels, stuff like that. So I'm not sure that's like the perfect comp, but anyways, it's five different criteria. There's also absolute return, and then there's individual contributions, which basically

it's just up to the committee's discretion to award some extra bonuses for non-financial performance. So don't love that, but some positives, some negatives. Now, here's the thing that I found kind of interesting. In June, 2022, this is a quote from the proxy, and I'm sorry in advance because lots of proxy language here. It says, in June 2022, the say-on-pay proposal did not receive majority support from stockholders. The company's 2022 financial results were significantly more positive than initially

expected. As a result, the annual bonus pool formula would have resulted in maximum funding for bonuses, including the NEO's bonuses, at three times target. However, since our 2022 compensation planning occurred when the ongoing impact of the pandemic was uncertain and in In response to stockholders' feedback, the target setting may have been conservative relative to consensus estimates. The compensation committee considered that a judicious, structured use of negative discretion would be appropriate. Basically, they revised down how much they were going to pay out, probably the right thing to do. They ended up setting relatively low targets, but the target was like 35% to 40% revenue growth. I think in the year you would have said, oh, that's pretty ambitious, but it was coming out of COVID and they just saw this massive resurgence. They weren't even really back to their 2019 levels. So was it worth them getting paid out 3X? Probably not. Basically, I think the executives are going to be paid $50 to $100 million a year, which for good performance at this level, this scale of a business, I really don't think it's that bad.

yeah it makes sense and you know something's a decent proxy statement that's better than most so you know i guess that's the positive here and if fogel ends up being a billionaire because he takes booking holdings to a market cap of 500 billion dollars while reducing the share count significantly over the next 10 years or something like that well i don't think shareholders can complain that we'll be fine it seems like they're fairly aligned revenue growth i think is fine here given the unit economics and given their priorities and the margin expansion that comes along with it i kind of wish they would have a revenue plus margin target uh profit margin target whatever the profit margin is but you know these these are okay but let's go through the stock what do

what do you think of the valuation? What are you estimating here? Given the market cap you have here of about $123 billion, what are the expectations on the stock today? Yeah, I'm trying to think of where to start here. So I'll go through just kind of the headline numbers. There's 34.9 million shares outstanding. The stock price, and this is kind of a little bit annoying to be honest three thousand five hundred thirty two dollars god bless fractional shares i guess god you know thank you robinhood for once for that one yeah and he was asked like are you gonna do a stock split and he's like no why would i want to do that there's no there's no benefit like well it might make people that have smaller sums want to get in he's like

there should be some level. He thinks there should be some barrier, some sort of... It's kind of like the Buffett thing where it's like, if you're going to save up money to buy shares, it makes you potentially a long-term holder and that's what they wanted. However, he did say

it's starting to make it a problem for stock-based comp. It's starting to make an issue for rounding errors. Someone's getting paid potentially $4,000 more if they get an extra share or whatever. So he said, maybe we'll end up bringing it down. Anyways, the market cap, $123 billion, $13.3 billion in cash and short-term investments,

$13.8 billion in total debt. It's fixed rate, low cost. I thought it was a pretty good job managing the balance sheet. They raised a lot of that recently when rates were incredibly low. So market cap of 123, $500 million in net debt, basically the exact same enterprise value as market cap, maybe give or take $500 million. So $124 billion enterprise value. Over the last 12 months, they generated $7.8 billion in free cashflow. Now, there are a lot of businesses out there that tech businesses specifically that talk about free cashflow, and then they put a ton of money into stock-based compensation or they masquerade a lot of expenses in there. And booking is not one of those businesses. So they actually pride themselves on being

pretty low stock-based comp issuers. And I'm going to go through this quote from the CFO and I'm going to read the whole thing. And it's long, but I think it's one of the best things I've heard a management team or an executive say on stock-based compensation. And I think it gives a good representation of who they are and how they think about the business. So here's the quote. He was talking about how they reduced share count by 8% in 2022. He says, we are proud of this accomplishment because it reflects both our commitment to return capital to shareholders and how carefully we manage our stock-based compensation expenses

and its dilutive impact. We continue to see many publicly traded companies pro forma out the very real expense associated with SBC. We strongly disagree with this approach, and therefore, every profit metric we report includes the negative impact of stock-based compensation expense. We view SBC expense as a very real cost of doing business across every stakeholder, should fully count when evaluating the performance and returns of our business or any business. Sorry, getting a little confusing, but here's the important part. He says, if anything, we view SBC dollars as even more valuable than cash dollars because of our long-term expectations that dollars worth of stock to date will be worth more

in the future. I'll leave it there. He does a very, they are cautious about giving away SBC. I love that. Nice to see. So I think using an EV to free cash flow multiple is fine. That's my long-winded way of saying that, which currently stands at about 16 times trailing free cash flow.

But you could also use net operating profit after tax, which is about 24 times. They've seen a big balloon in their accounts payable lately because of the push towards merchant revenues instead of agency revenues, which is starting to, I think, inflate free cash flow a bit relative to operating profits. Yeah, I was going to say, do you think free cash flow is a bit misleading? I don't know if, yes, they're going to earn the interest income. I guess balancing the two, but having that in mind that free cash flow isn't technically all of the money that's available to return to shareholders each year,

especially if they're growing at a decent clip. If that accounts payable is growing at a decent clip. Yeah, I don't know what to do. I have the same issue with coupon right now where they've seen a big balloon in the accounts payable and it's like, that's not really true cash flow that you can get back but at the same time it's better that they're doing that in a high interest rate environment where they can start to earn money like earn interest on that actual money so

yeah maybe it's i guess maybe you could use net income or yeah i would just use this operating income doesn't encapsulate the interest income that they'll be earning so i don't think free cash flow is that bad maybe you could just blend notepad and free cash flow but either way it's not a super demanding multiple. So I'm going to talk about some of my expectations here. My assumptions, I put together a very simple model. I think for our recurring listeners, everyone knows we don't do anything too exhaustive, but here are my assumptions. 8% annual revenue growth. That's about double the growth rate of the travel industry over the last 10 years annually. That's below where they've grown historically. I think that seems very doable.

40% free cashflow margins in five years. They're currently at 38%, but as we talked about more and more of their bookings are coming from the mobile app. So it's a higher margin transaction. And yeah, I just think 40% free cashflow margins is achievable in five years. Last one, all of their cashflow will go to buybacks, which this is where it becomes kind of a projection. I guess they're all projections, but this one's hard to measure. I think they'll reduce share count by about five percent every year which who knows because the stock price could change rapidly and if it goes up a ton then they're probably not going to be able to reduce the share count as much anything to add brett i see you reaching for your mouse um

do you think you might be underestimating the margin here yeah i guess there could be possible yeah but it's been around 30 to 30 it's been like 32 to 38 percent but over the last 10 years and some of the free cash flow margin expansion lately has come from that accounts payable growing so 40 might be real a realistic upside scenario all right last part here okay go ahead now i was gonna say it all makes sense besides that that was the only thing that i was like maybe you're underrating that but probably going to be conservative okay and then the last thing is just an exit multiple of 15 times it's low relative to where they've traded historically but better conservative than not basically if you do the math there in five years you would be

getting about a 14% return annually. They'd be doing about $12 billion in free cashflow on $30 billion in revenue. I think that all seems pretty doable, which just goes to show that the multiple is not too crazy for this business. Yes, that is correct. I think, yeah, the shares outstanding reduction makes sense given the multiple you're going for, although technically 20 would be a 5% reduction every year. Well, I guess it'd be more of the market cap, but kind of the market cap is the same as the enterprise value. But either way, the math's not too different.

So, yeah, I mean, 14% annual return seems solid, seems low risk given the competitive advantage that they've been able to attain in their core markets. But there's always risks. risks we always talk about at the end to kind of i guess rein in any listeners or ourselves when we get too optimistic on something so what could go wrong here what are the risks you identified when researching booking yeah there's a couple the big one for me is airbnb encroaching on their market As I mentioned earlier, this is hard to tell how much this is happening because booking

has grown anyways, but Airbnb is big and it's big globally. They are a very user-friendly app and they have a lot of supply as well. Not really from the big hotels and I don't know how much they have of the boutiques and stuff in Europe, but it seems like a very real risk. And it's something I would probably watch every quarter. And if you are a booking shareholder, I think you should be reading every single conference call that Airbnb does and trying to monitor their progress as well. It seems very possible that most accommodations just do a list. They list on Airbnb, they list on Expedia. They list on booking.com and it is not a winner take all market. And then it just

continues to kind of march up both those businesses, booking and Airbnb continue to march upwards. Second one for me is a travel industry slowdown. This is obviously possible. And I think some people, maybe that's why it's getting a bit of a cheaper multiple than it has in the past. But I would say if there were going to be a travel industry slowdown, I would probably want to own the one that's capital light and doesn't require a bunch of fixed expenses, doesn't have a bunch of airplanes or hotel buildings, that kind of stuff. So they're going to generate a profit in pretty much any environment. Third is, and this is a big one, and I don't know whether it's happening or not, but if branded hotels were to really grow in non-US markets, so if there are more and more chains in Europe or Asia or stuff like that, it becomes a risk to Booking's platform because their

value isn't quite as high. So those are kind of my big three. What do you think of those? Yeah, those make sense to me. it's hard to see how someone who is a direct competitor to them would win. But like you mentioned, someone that comes at it with a different angle, which could be an Airbnb or someone else, but clearly Airbnb is the largest competitor coming at them with a different angle.

And then the direct competition from the vertical integration from some of these hotels. the relationship between airbnb and booking is interesting they both succeeded but booking has pushed into what they call the alternative accommodation market and i think my question would be do you think booking is succeeding in these alternative accommodations because i know management likes to brag about it but you didn't mention that different definition or maybe i don't know are they truly like building that second airbnb where they're you know there's a lot of arguments out there that they could steal share from airbnb given given the success that they're touting it's really hard to tell and they give pretty minimal disclosure around

alternative accommodations. We talked with our friend, Alex Morris at TSOH Investing, and he said, go back and check their alternative accommodations growth from, I think they reported every 10K. And one year I kind of just jumped. So it kind of either there was some acquisition that i missed or they reclassified their definition and just asked some of the accommodations to say like you know can we list you under alternative accommodations as well probably i don't know uh it feels like they are not going to if i were betting on which business would grow quicker from here it's airbnb i think i think both will do well i think both will get alternative accommodations growth

but airbnb is friendlier to the individual property owner it's kind of tough to talk about their alternative accommodations relative to airbnbs since they don't provide enough disclosure so that is probably the one thing i'd like to see is a little more color around that or commentary from the management team okay as we wrap things up do you think booking is investable today are you buying shares at these prices well i don't know if i i can't buy shares i i do think it's investable here and i think you could do well owning both airbnb and booking but quite i might buy one share because, frankly, the share price is quite high.

And at $3,000, $3,500, I guess, it depends how much money you're managing. But for the individual investor, it might take a little bit to maybe a month or two of pouring money into your IRA or something to get a share. So for me, I will probably buy a share in the next week. It's a wide moat business. It's difficult to disrupt a marketplace that has this much supply and this many users.

And that mobile app, the fact that more than 50% of their room nights are being booked through the mobile app was a huge selling point for me because it makes it feel like they're more insulated from the competition. So I think it's Widemote. i think it's got a good management team with the right capital allocation strategy and it's not that expensive it feels like you could get 10 plus returns from here over the next 10 years annually so yeah i think i'll probably buy a share okay final question why booking over someone like american express no it's not the exact same but

seems like this is your this is your question to anything well for a large cap i guess that's one of my favorite questions i think maybe ford earnings or multiples pretty similar i don't know especially because it's travel related do you think they have a wider moat than american express both pretty wide you know but i don't know probably similar they amex has done a really good job over the last four or five years and i wanted to own them i was thinking about buying shares and then we had our savings in limbo for like three weeks and the stock jumped like 20 so it's probably still not that commanding of a forward multiple for amex and I would probably have to re-look at them,

but I wouldn't say it's one over the other. I would be very comfortable, very, very comfortable owning both. Okay, that's a great way to end things. I guess I will say we did do a full episode on American Express last year. Search that in your podcast player, you'll be able to find it.

Thank you for listening to Chit Chat Stocks. Again, I'm going to just say that name a lot so people get it honed into their minds. And let me hit the disclosure. We are not financial advisors. Anything we say on this show is not formal device or recommendation. Ryan, I, and any podcast guests may hold securities discussed in this podcast. We may have held them in the past.

We may buy, sell, or hold them in the future. Final question. Ryan, anything on your mind for your next stock you're going to research? I'm not sure. I don't know. do you have anything in mind for me this was a recommendation from a lot of listeners so I'm really glad this was

recommended I guess I don't have anything top of mind right now yeah the listeners hey do recommend them sorry if you recommend electric vehicle shitcos we're not gonna do those sorry a lot of people seem

to send in stuff like that this is a fun one if you have any sort of you know viable business that you'd want us to research what about gogo the wire the internet company for airplanes that's i read it i don't i read i read a pitch on them and i think it might be outside of my competency more for me then that's that's more my speed yeah i'll let you know if i find one okay yeah we'll probably tease that one of the next episodes i'm researching elf beauty or i And I said, ELF, I got the periods in there, but thank you everyone for tuning in.

Hope you got some value out of this episode and we'll see you next time.