In the final instalment in my 4 part series reviewing my investment decisions in February, I walk through my thought process that led me to buy shares in Booking Holdings (formerly Priceline). My decision turned out to have little twist which I shares at the end. The podcast version of my analysis is available here (iTunes).
Previous blog posts in this series
Opened position in Booking Holdings (Ticker: BKNG)
Q1: What do they sell?
Per Reuters, “Booking Holdings Inc., formerly The Priceline Group Inc.,is a provider of travel and restaurant online reservation and related services. The Company, through its online travel companies (OTCs), connects consumers wishing to make travel reservations with providers of travel services across the world. It offers consumers an array of accommodation reservations (including hotels, bed and breakfasts, hostels, apartments, vacation rentals and other properties) through its Booking.com, priceline.com and agoda.com brands. Its other brands include KAYAK, Rentalcars.com and OpenTable, Inc. (OpenTable).”
My view and experience with Priceline has always been that “Let’s Make A Deal” type concept where you select whatever is behind Door Number 3 as what your hotel that you randomly booked. This an also William Shatner who has been the public face of the company. That was my filter of the business, but after digging into it, I discovered it is much more than that. The real engine of the company is not Priceline but Booking.com. It is one of largest travel portals out there. I also didn’t know that they own the OpenTable restaurant reservation website.
Essentially the suite of Booking’s website is a reservation website for leisure and travel. They book the key milestones in the travel experience; transportation (planes, trains, and automobiles), accommodation, and eating. They have built these segments primarily through acquisition.
Q2: Who do they compete with?
The travel reservation space is quite a crowded one with comparable players being Expedia and specialized services such as Uber/Lyft, Google Flights, Hotels.com, and Trip Advisor.
Q3: Who buys their products and services?
Their customer base can broken down into recreational and business travelers. They are looking for competitive pricing for their travel needs.
Q4: Will they buy their product over and over again?
If people perceive they are getting a good deal, they will come back. Travelling is a core necessity of life. We will always be on the move whether it is for work or play.
Q5: Do they make money?
The company is generating significant Economic Profit. Returns on Invested Capital have tracked between 52 and 77 percent which is really good compared to its Cost of Capital which comes in around 10 percent. Revenues have been growing in the 13 percent range.
Q6: What do they own and who do they owe money to?
The financial position of the company is strong. The company has 2 times current assets over its current liabilities so it is very liquid. It has more than enough cash to pay off its long term debts. The quality of assets is high with about 20 percent of total assets classified as intangible.
Q7: How risky is their business?
It would appear on the surface that barriers to entry are somewhat low. I can’t see any reason why a Google or Amazon couldn’t set up their own travel portal and compete with Booking. That being said, Booking has a great opportunity to build a bit of moat around by positioning itself as the go-to ecosystem or OS for travel services. If it bought out a company like Uber or Trip Advisor it could offer a one-stop solution for travel services, by leveraging all the user data to build out an Artificial Intelligence engine that would literally arrange trips. Scott Galloway visualized what that would look like from the perspective of the potential of Uber to own the OS for travel, however I think Priceline/Booking may be in a better position to do this.
“. Leveraging AI, cheap capital, and relationships with 40M of the planet’s wealthiest consumers each month, Uber should expand its offering (dramatically). Same interface, but instead of entering “ACK airport,” where I’m headed Sunday morning, I type in “London,” and using AI — connecting the dots of my preferences, economic weight class, deals at the time, APIs — Uber presents the best options for not just the ride to the airport, but the flights to JFK, then London, the car that picks me up, and the hotel I stay at.”
This concept is what made me get a bit more interested in the stock. The question was is it a good time to get in?
Q8: Is the stock cheap?
On a discounted cash flow basis, valations for Priceline/Booking come in between $1640 and $2400. When I looked at the stock in February it was already falling in price from the $2100’s down to $1730. There was nothing fundamentally wrong with the company. It appeared to have got swept up in the early February meltdown. I thought that there may the potential for the stock to increase 25-30 percent.
Decision: Booking.stock = Booking.yeah!
There is still something cheezy with the Priceline/Booking. It exudes like a pre Dotcom crash stock of 1999. Also, William Shatner again. The reality is the company has positioned itself as being a best of breed in online travel. It is generating tangible wealth for its shareholders. It is financially strong and while new challengers can potentially impact the business, the company because of its position has an opportunity to build a unique ecosystem and become the go to source of travel reservations with some thoughtful strategic moves. This potential of being the OS for travel is what got me interested in the stock. When the stock dropped to the $1730 I decided to open a small position and build it up if it should continue.
UPDATE: Within a month of buying in, the stock surged 25 percent. I’m not one to trade in and out of positions within a few weeks, but the move really challenged me to decide whether to bank the profit as it had crossed my return threshold. The last time something similar like this happened was in 2008 when I bought Goldman Sachs at $100 and it went up to $130 the next day. I sold it right away and sure enough it was smart as later in the year the market imploded. At the end, I also decided to sell the Priceline/Booking position to stay true and consistent with my investing ideology. It was very easy for me to let emotions convince me to hold on. I like the business and the potential for it, so I will keep it on my watch list and if it should meaningfully pull back even though the fundamentals are strong, I would be motivated to buy back in.