Image shown: Booking Holdings share price performance in recent years. Note the magnitude of share price volatility around quarterly earnings reports.
Shares of simulated Best Ideas Newsletter portfolio idea Booking Holdings faced pressure following its second quarter earnings report August 9 as it issued conservative third quarter guidance that disappointed investors. This has become a common occurance for Booking Holdings.
By Kris Rosemann
Simulated Best Ideas Newsletter portfolio idea Booking Holdings (BKNG) turned in a solid second quarter report August 9 as total revenues came in at $3.5 billion, a nearly 20% increase from the year-ago period, and gross travel bookings grew 15% on a year-over-year basis to $23.9 billion in the quarter. Adjusted EBITDA leapt 35% from the comparable period of 2017 to $1.3 billion, while non-GAAP net income per diluted share jumped 36% to $20.67 as a lower tax rate and marketing spend were only partially offset by investments in new markets and capabilities (digital channels). All of these metrics came in above the company’s guidance for the quarter, for which it was punished following its first quarter 2018 report.
Shares of Booking Holdings faced a familiar fate following its second quarter 2018 report as management issued guidance below what the Street was looking for, but this is a scenario shareholders are likely all too familiar with. In the past, releasing conservative guidance had, at times, enabled the company to easily beat its own publicly issued expectation and helped drive share prices higher–the most recent example being its fourth quarter 2017 report. However, its first two quarterly reports of 2018, both of which contained “disappointing” guidance from management, were met with selling pressure in the trading session immediately following the reports. We think it might be time for management to revisit its guidance practices, but on its second quarter conference call, it noted, “Our approach to guidance has not changed.”
We do note, however, that Booking Holdings’ top-line growth rates are decelerating, and this may be playing a material role in the market’s negative reaction to its guidance. However, decelerating sales growth may be due to the company’s significant size and increasing maturity more than any fundamental deterioration within its business, and management points to its growing level of market share in an expanding portfolio as cause for optimism. Robust double-digit sales growth rates of recent years are simply not sustainable over the long haul, and our fair value estimate for the firm incorporates decelerating top-line growth in coming years.
Booking Holdings continues to generate strong levels of free cash flow, which came in at nearly $2.1 billion in the first half of 2018, up from less than $1.5 billion in the comparable period of 2017, even as capital expenditures leapt 60%. The company’s balance sheet remains reasonably healthy as of the end of the second quarter as its total debt load of nearly $8.8 billion is slightly higher than its cash balance of $7.3 billion, which does not include long-term investments of $9.4 billion.
Our fair value estimate for Booking Holdings currently sits at roughly $2,100, and we expect to continue highlighting the idea in the simulated Best Ideas Newsletter portfolio as its top line marches higher and bottom-line performance remains impressive. Though we are focused long-term, short-term fluctuations in the company’s share price are never welcome developments. We think management might reconsider its approach to issuing quarterly guidance if it wants to avoid unnecessary share price swings around its quarterly reports, but this does not appear to be the case. Regardless, a one-day overreaction to another issuance of conservative guidance is not going to change our thesis, even as we stand ready to pull the trigger should forward-looking guidance reveal a change in its fundamental trajectory.
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.