Image Source: Luca Conti
Simulated Best Ideas Newsletter portfolio idea Booking Holdings delivered results ahead of expectations in a number of measures in the third quarter, which is a seasonally busy quarter for the company.
By Kris Rosemann
Shares of simulated Best Ideas Newsletter portfolio idea Booking Holdings (BKNG) received a nice boost from the release of its third quarter report November 6, which followed a second quarter report that drove shares lower as a result of disappointing guidance issued. In its third-quarter earnings call, management stated that the lower third-quarter guidance was a result of it being in a period of relatively high uncertainty due to the impact of the World Cup and unusual weather in Europe during the summer travel season, but it also noted that its approach to guidance has not changed. The company expects its overall growth rates to decelerate moving forward due to the sheer size of its business and long-term trends, commentary that is consistent with prior quarterly outlooks.
In the third quarter, Booking Holdings reported 13% year-over-year growth in room nights booked, which easily exceeded the high end of its guidance, as it passed the 200 million room nights booked in a quarter threshold, and gross bookings advanced 12% from the year-ago period, which also handily surpassed its previously issued expectations. Total revenues also beat expectations in the quarter and came in at $4.8 billion, an 11% increase from the comparable period of 2017, and adjusted EBITDA grew 8% on a year-over-year basis to $2.36 billion in the period, a figure that was directly in-line with the upper bound of guidance.
However, its adjusted EBITDA margin checked in at 48.7%, slightly lower than management’s expectations and down more than a full percentage point from the year-ago period due in part to higher marketing spending, which the company attributed with helping its room night growth. In its efforts to drive direct traffic to its websites, investors should note that direct traffic is growing faster than the overall traffic rate and is its largest single source of new customers as the firm dedicates more resources there, Booking Holdings grew spending on brand marketing by 27% over the third quarter of 2017. Net income per diluted share increased 8% on a year-over-year basis to $37.02 thanks in part to a lower share count as net income rose 3% and approximated the high end of third quarter guidance.
Free cash flow at Booking Holdings continues to impress, and the measure grew 19.4% to $3.9 billion in the first nine months of 2018 over the comparable period of 2017 despite capital spending rising more than 59%, and its free cash flow as a percentage of non-GAAP total revenues expanded to 34.5% from 33.7%. The company’s balance sheet remains in sound health as it holds $8.7 billion in total debt, all of the long-term variety, compared to $7.1 billion in cash, cash equivalents, and short-term investments in marketable securities and $9.1 billion in long-term investments.
All things considered, we were pleased to see a solid quarterly report from Booking Holdings and a favorable reaction from Mr. Market as the company cruised past a number of the guidance measures that sent shares tumbling after its second quarter report. We expect to continue highlighting Booking in the simulated Best Ideas Newsletter portfolio as its business benefits from a virtuous cycle, one that should be enhanced by management’s efforts to drive traffic to its platforms. Its partnerships allow it to offer an enhanced customer experience, which drives increased conversion and traffic, and growing traffic levels give it the opportunity to test and improve customer and partner satisfaction. Nevertheless, we are closely watching overall company growth rates as management indicates deceleration should be expected, which is reflected in our current fair value estimate for Booking Holdings of $2,092 per share.
Related: TRIP, EXPE
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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.