Image Source: Luca Conti
You may have read this sentiment before: shares of Booking Holdings, formerly Priceline, are facing pressure following a solid quarterly report as management continued its habit of issuing conservative quarterly guidance.
By Kris Rosemann
Shares of simulated Best Ideas Newsletter idea Booking Holdings (BKNG) faced selling pressure following its first quarter report, which came after the close May 9, as Mr. Market was disappointed once again by management’s second quarter guidance, a dynamic that has played out multiple times in recent years for the company formerly known as Priceline.
Nevertheless, Booking Holdings turned in solid first quarter results as room nights booked grew 13% from the year-ago period, and gross bookings advanced 21%. Consolidated revenue climbed 25% as reported on a year-over-year basis even as its performance marketing optimization efforts continue to impact its top-line growth. Efficiency benefits from its strategy of improving performance marketing ROI continue to benefit its margin performance as GAAP operating margins expanded 115 basis points in the quarter from the comparable period of 2017, and GAAP operating margin leapt 31%. GAAP net income per share increased 35% to $12.34.
Booking Holdings’ cash flow generation improved significantly in the first quarter as cash flow from operations jumped 68% from the year-ago period, and free cash flow grew 64% to $508 million. The company’s net debt position improved slightly in the quarter on a sequential basis to less than $2.1 billion as total debt reduction was partially offset by a decrease in its cash and marketable securities balance due to cash used for debt reduction and nearly $720 million in share repurchases in the quarter.
Booking Holdings’ second quarter guidance includes a deceleration of room nights booked, total gross bookings, and revenue growth, but adjusted EBITDA and GAAP net income per diluted share are expected to expand on a year-over-year basis (~10% and ~13% at their respective guidance midpoints), which in part reflects its performance marketing optimization strategy. The strategy has helped the company realize two consecutive quarters of adjusted EBITDA margin expansion as of the first quarter of 2018.
Management attributes its relatively conservative top-line guidance to the complex and volatile environment in which it operates as a number of factors that impact its top-line performance are outside of its control, and those factors include a potentially volatile macro environment, competitive actions from peers, and/or other factors from non-competitors such as SEO algorithm changes. We think management is aware of its tendency to issue guidance below market expectations, which can help set it up for later quarterly beats, and CFO David Goulden went as far to say on the quarterly conference call, “And our approach to guidance has not changed.” This likely will not be the last time we see conservative guidance from the company.
Despite its disappointing near-term guidance, management remains confident in the long-term positioning of the company. Three key factors drive its optimism: 1) travel spend is largely a function of world GDP, which is expected to continue growing; 2) the offline to online trend will continue on a global basis; and 3) Bookings Holdings has a small share of the travel industry (single-digit market share in the accommodations business). The company will continue to add inventory in terms of available rooms and other accommodations on its platform in an attempt to continue gaining market share, and the ongoing offline to online transition–not to mention the proliferation of mobile use, which Booking Holdings is confident in its presence–should help in this area as well.
All things considered, we’re not overreacting to another quarter of light guidance from Booking Holdings, and we expect to continue highlighting the idea in the simulated Best Ideas Newsletter portfolio. We currently value shares at roughly $2,000 a piece, and we continue to encourage investors to focus on the firm’s long-term fundamentals rather than share price swings that may occur around quarterly results and guidance issuance.
Related: TRIP, TZOO
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.