Transcription
Hello everyone, and welcome back. In this video, I want to talk about Booking Holdings. I want to go through the financials, the moat, the valuation, and you will know if I'm buying or not the stock because it's a quality company, and it seems like the stock is dropping and dropping and dropping. On a year-to-date performance, we are at minus 19%. It's a good quality company that is maybe cheap. So, in this video, you will also know whether I'm buying or not, and if so, at what price. Okay?
Because I have received a lot of comments regarding Booking. Some people saying, "Okay, if you like efficiency beast of companies, why don't you look at Booking Holdings? It's a good quality compounder." And I hear you. Okay?
So, in this video, I want to um talk about the company and show you what I discovered recently because, of course, I analyzed it. Of course, I've been following following Booking Holdings for a while now. So, of course, it's my watch list. It's an asset-light compounder that has a lot of room to grow in the future. Okay? I think we can start.
In case this is your first video from this channel, welcome. My name is Kristou Nour. I've been investing in the stock market for almost a decade now, and I have achieved a performance of a roughly 25% per year, which would be at 24, 25% per year right now. Okay? And um thank you for all your comments, by the way. Okay?
What do you think about Booking? It's a high-quality business, asset-light, is doing massive buybacks in the future, and maybe it will be helped by AI. Okay? So, let me show you what is Booking Holdings, what it matters, what are the different segments, how they are profitable, and the history of the company, something that is not often talked about online.
So, Booking Holdings does not only the website called booking.com. They have many other websites. It's the largest online travel agency by sales, and they do hotels but also airlines, but also restaurant, but boats, cruises, and now they are starting to do experiences, okay?
So, if you want to visit the beautiful Eiffel Tower, you can book a guide on Booking Holdings, okay? Like a travel tour on Booking Holdings. It's tiny, but they are working on this one. And they have many websites. They have booking.com, very famous in Europe. You have Agoda. You have OpenTable to book a table at a restaurant. You have rentalcars.com and Kayak to compare the different prices, okay? Different business models, by the way. Different websites, different business models, okay?
If you look at the margin profile over time, it has changed a lot. If you look at the different segments, they have changed a lot. So, let me start by showing you the revenue coming from merchant, agency, and advertising, okay?
So, this is what we have. We have a big triopoly when it comes to the three segments. The orange line is the agency revenue, common size. So, how much of the revenue is from agency? In the past, it was 75% of the revenue, and now 28. A big, a big drop, right? And what happened?
You have the blue line, the merchant revenue. Before, it was a 16% of the revenue. Now, it's 66, so it's massive. And then in purple, you have advertising. We don't care about advertising. It is not important to the thesis. It's only 4% of the revenue. We don't care. So, what happened? That's a very good question.
If you look at the past, even the past 20 years, I would say, you had a one big segment, uh the reselling segment, okay? It was this one, the agency revenue. Basically, it's like Kayak. When you go on Kayak and you want to compare different prices for air tickets, airplanes, for example, you have different websites. And if you want to buy the ticket, Kayak will lead you to another website. I don't know, Delta Airlines. And Kayak will get a commission because you went through their websites, okay? So, that's the business model.
What about the other one, the merchant business model that is on the rise? Instead of being a third-party company, I mean, a platform website to go to real official websites, you buy your plane tickets on the website itself, on booking.com. And a few years ago, you had a change in management team for Booking Holdings, and they decided to change the business model. Instead of taking a commission and directing you to uh the official website of Delta Airlines, we are going to take your credit card now on our ecosystem, okay?
And this is what you see, the big shift in monetization from orange agency revenue being 76% of the revenue 10 years ago to now 28. So, it seems like it has worked. Before, only 16% 16% of the revenue was um paid on Booking Holdings, right? And now is the large majority of the revenue from merchant, okay? So, you pay and you book your tickets on the website, uh booking.com. And you have the same thing for if you want to book a table or something else. Um okay, so that's the first big difference.
And if you look at history, um I don't like to invest in companies that are seeing massive changes in their business models because it's not the first time they make this twist. Uh in 2005, 2006, the margin profile was way different. The growth rate was way different. Let me show you what I mean.
I can show you the growth rate over time. The total revenue, percentage growth rate for the past 20 years. In the past, the growth rate was 30% per year. When it was agency, right? Like a third party, you get the commission to direct to the official website. This segment was growing a lot. Revenue was growing 20% per year, and 20% per year, and 20% per year. Okay, you are asset-light. You don't have a real um payment processing platform. You just give links to people, and they book their flights, their hotels to another website.
By the way, if you want to become a better investor and improve your performance, I have a coaching program. It gives you the exact method I've used to generate 25% per year for almost a decade. More on that at the end of the video.
And it seems like since they made this shift to grow merchant, so that's what, 2017, something like this, the growth rate is not great. It's decent, but we are not at 20, 30% growth rate like we had in the past. Still, revenue is growing roughly 15% per year. Life is good. We are talking about a business that is always profitable, always growing, apart from 2020, of course. Travel was a blocked and a big rebound in 2021, 2022. We are in front of a business that can grow revenue at 15% per year.
And what about profitability? They are constantly profitable, and the operating margins are at 33%. Pretty good, right? Pretty good business. Fundamentals are good. The company is growing profitably, and it seems to work. Okay.
So, now I've talked about the two big segments, the changes business model that is working. And why do you have this business model? Well, you have a few suggestions. Why do you want people, customers, to pay on Booking Holdings instead of going to the official website of airline company? Very good question.
I have a few guesses, but I would say if you take the payment up front from your clients, the money is going to you, Booking Holdings. And if a customer wants to buy a airplane ticket for 6 months, you can get his capital for 6 months as a float, like an insurance company. And then you can invest in short-term treasuries. Like you have a float instead of uh the airline company taking the money up front in 6 months or now, you have 6 months to play around with the capital. Okay? And this accumulates over time.
You can see this this line on the cash flow statement. Uh where is it? Other adjustments. Well, well, well, I have to come back to it. Maybe that's this one. Deferred merchant bookings, yes. I think this is this one. If it is not this one, you can check. Deferred merchant bookings and other current liabilities. Yeah, I think this is this one. So, this is positive most of the time, apart from COVID, right? You get my point. Travel was a shutdown in 2020, so it's a very special year. But, most of the time, let me put it last 12 months. Most of the time, you have an additional cash inflow. The blue line is positive, which means they get cash upfront from their customers. People pay on the platform, so that's cash for them. For Booking Holdings, and it acts as a float. But, it is not the real cash flow. Okay?
And now we are talking about the specific item on the cash flow statement. You have an adjustment to make for the free cash flow. You have an adjustment to make for the operating cash flow, because this is not real cash. It's float. It's not a real cash inflow. It's float. It's money that you have, but then in 6 months, you will give it to Delta Airlines. Okay? So, maybe you want to adjust this for the valuation. We'll talk about the valuation later. Okay, so all in all, what do you have?
You have a company with a market cap of $130 billion that is in a winning category, especially in Europe. In the US, you have Expedia that is leading by far. Booking Holdings is not so much working very well in the US. But, in Europe, that's very fine. Okay?
The margins are pretty stable. Operating margins of 35%. Net margins of 20%. Always profitable. You have a revenue that is always growing, apart from 2020. Net income, always growing. Always profitable. Free cash flow, up into the right. This is lovely, even if you take into account the adjustment.
And the company doesn't have a debt problem. You can see here they have what? 17 billion dollars of cash for 19 billion dollars of debt. So, no debt problem at all. And the company became more efficient since 2021 with a ROIC, as you can see here, at 30%, 40%, 50%. ROIC is a measure of efficiency return on invested capital, and it is pretty good. So, all in all, plenty of good attributes. And what do they do with the cash? They do buybacks.
Let me show you the net income of the company versus the buybacks. You can see that the majority of the net income is used to fund buybacks. So, the past 10 years, buybacks, buybacks, buybacks. They use everything they have, all the net income, all the cash, to do buybacks. And over time, this is a company that has repurchased how many shares per year per year? You have a buyback yield that is quite good, actually. You can see here. Here we go. So, yeah, anything can work on a quarterly basis. I can even show you on the annual basis what it looks like.
So, you have 20 years of data. 20 years ago, the company was diluted diluting shareholders using more shares. It was a big business that was a quite different back then, growing a lot with dilution. They were very aggressive. And then, something happened. A new management team happened. And since 2015, 16, 17, buybacks, buybacks, buybacks all the way. And in 2019, the company bought back like 9% of shares. In 2023, they bought back 9% of shares. And now they are buying back 4%. So, pretty good.
The capital allocation policy is very good. The company is using all its cash flows to pay buybacks, even if you don't adjust for the merchant float. This is your operating cash flow over time, up and to the right. This is your capex in orange. Capex in orange is not moving. Capex has not moved in 10 years. So, it's a very capital-light business, and the orange is irrelevant compared to the size of the blue. The size of the blue is just immense. So, almost no capex.
They don't have a debt problem, as I told you before. They are issuing more debt, paying more debt, issuing more debt, paying more debt. So, debt is not a problem at all for this company. And they are doing large buybacks. And do they pay a small dividend? Yes, it's here. Okay, so let me size up.
Effectively, in purple, this is buybacks. You see how important buybacks are for this company. I love this. It's a capital-light business. I love this. Minimal capex. I love this. Almost a monopoly. I love this. And they are doing massive buybacks. I love this. And they have too much cash. They don't know what to do with the cash. So, they issued very recently a new dividend. Since 2024, they have too much cash. They don't know what to do. They are paying a dividend. Like the Okay, this is a very nice problem to have. Very, very nice problem to have. Okay, did I mention everything? Uh growth rate.
Yeah, I covered all the good points. The business model that is changing, profitable, the adjustment of the cash flow. And if you look at their investor presentation, it's very clear how they will become profitable. It's very clear what their strategy looks like. They show you in very simple terms, simple English, how they are going to grow in the future. They show you the different slides. The tone is very bullish, is very honest. They have this beautiful slide about their strategy, their plan. They plan to grow bookings at 8% per year. They plan to grow revenue at 8% per year, and because of more margins and more buybacks, they plan to grow adjusted earnings per share at 15% per year. The tone of the management team, the vision of the management team, I love it. Okay?
So, plenty of good good arguments, and now the stock is down principally because of a disappointment when it comes to AI and geopolitical conflicts, of course. So, fewer bookings in Middle East, but also Middle East guys doing fewer bookings from abroad. Okay? So, geopolitical tensions are not helpful in the travel industry. So, Booking Holdings is being impacted. Do you think this geopolitical conflict will last or not? Actually, it depends on you. This is not a political video. You do whatever with this information. If you think the conflict will get resolved, then the fundamentals will rebound sharply. This is very simple. It's not the first time it happens. So, yeah, it's mostly short-term problems, temporary problems we have here. Okay, so we've talked about the tone of the management team. Management team knows what they're doing. They are talking about efficiency. They are more aggressive to grow, and they want to go into accommodation, but also flights and dining and attractions and transportation. They want to be more diversified because this is high margin. And let's talk about the first thing I don't like.
They are pushing AI with this slide, how they are going to integrate AI everywhere. And I'm not convinced. I'm not convinced AI will help them a lot actually. At all. I can show you the different things they have: the room nights, rental car, airline tickets. The blue line is room, hotels. This is what matters. Hotels, accommodation.
How can AI be used to improve the customer experience? It's a very good question. Now you have this worry that AI agents will book your hotel for you. I disagree for the moment. Uh for the moment I disagree. Maybe AI will be here to help you, to recommend some things based on your taste, based on what you like, based on your budget, based on your timing, based on how many family members you have, based on geographically speaking if you want to be to be near the city center or near the the forest. Yes, it can recommend things, but it will never do the complete customer journey with you. How can this improve Booking Holdings? I don't know. How can, I mean, is this a big deal or not for Booking Holdings? I don't think so. So, I don't buy their AI ecosystem. I've read the sub stacks. I know what people think, but I just disagree on this one. I don't think AI will be a big deal. Okay?
Now for the moment they are introducing chatbots, AI chatbots. If you have a problem with Booking Holdings, you want to cancel, instead of speaking to a human, you speak to an AI chatbot. This is your efficiency? This is your AI new world? I'm not convinced. They doing some cost-saving measures with AI chatbots, okay? We have We have this amount already in the latest earnings call. They were talking about this one. They are saving a few millions of dollars because they could fire some staff and hire AI agents. That's it.
How can you implement AI everywhere? And this is where I fail to understand the AI story. Maybe the reason why I'm not a shareholder. In this AI-driven world, I want to be positioned with companies that will either benefit from AI or not be in danger for most of my holdings. For Booking Holdings, I don't see the big tailwind, okay?
I have invested in a I mean, my biggest position at the moment is Fortinet. So, cybersecurity. That will see a clear tailwind coming from AI, right? More cybersecurity attacks. The second largest position is MSCI. With their own preparatory data, you can go and fetch data faster than ever to create custom products with AI. So, clear use, clear tailwind, okay? The world will accelerate. You want more custom indices, accelerate. For Booking Holdings, I fail to understand the AI success, the AI tailwind.
And same thing is true for the small items like uh in orange, renting a car, in purple, airlines ticket. So, and then you have what? Experiences. It's not even there. Merchant bookings. Anyway, you have experiences if you want to book a a tour around Paris. Well, what is even better is a call me if you want to a guide for for Paris. It would be even better. Anyway, [clears throat] so first thing I don't like is they talk extensively about AI, but I don't see it as a clear beneficiary.
Also, something I failed to understand or I'm not a shareholder is I don't really understand the um competition around Booking Holdings. Yes, you have a few players. Yes, you have you have Expedia. Yes, you have Airbnb to some extent, but what are the clear links between all of them? Maybe Booking Holdings wants to go into the US, but fails because Expedia is just so strong. Booking Holdings seems to be a cash cow in Europe, but what are the real threats when it comes to competition? I don't know. And I analyzed it and I still don't know. After having analyzed it, I still don't know. So, I'm not sure how to grasp the competitive threats. Okay.
Apart from this, I don't see anything. So, very minor uh negative points. The large majority of the company is positive. The growth rate is fine. They're always profitable. They seem to be in a very niche market and it works out okay. They're doing massive buybacks. The earnings per share is growing like 15% per year. Life is good. So, what is evaluation? At what price what price would I be interested?
I think it's a mistake to look at the free cash flow for this company because I as I told you before, they have a float. So, it's not their cash. So, you have to adjust it. Similarly to MercadoLibre, MercadoLibre, you have a line deposits from clients that is accounted as cash inflow. That's not their cash. It's cash from clients deposits. So, the free cash flow of Mercado Libre is fake. The free cash flow of Booking Holdings is fake because that's float. Okay?
Now, if you look at the forward price to free cash flow, we're at 12. Extremely cheap. I would just look at the basic forward P/E ratio right now. And we're at 16. Which is more than reasonable, actually. You can look at the past. Like before COVID, we were oscillating between 18 and 2025 and 25. 17, 18. Then, because it was impacted by COVID, the valuation was nowhere. I mean, it was very strange. And now, after COVID, here is the valuation model we have. Okay. This is your valuation. I would say the forward P/E ratio is the best indication of valuation. I would never look at the price to cash flow for this one.
In 2022, we dropped as low as a 13, 14. Then it went up a lot to 25. Quite expensive, by the way. Uh and then we are back to 14 and it rebounded to 16. Frankly, the risk-reward seems to be appealing on this one. I could be interested. But I'm not particularly a fan of the um travel industry. Okay? So, for my own taste, if it drops at like below 14, if we if we break this support here, I could be interested. Okay? 14, 13, something like this. Apart from this, no. I want it to be extremely cheap, so I don't make a mistake on this one. I have no clear expertise about this market. And um I think what I am buying in 2026 um has a better risk reward than Booking Holdings.
For example, maybe FICO that I just bought, Fair Isaac, has a better risk reward. Because they are not they are not growing their earnings per share at 20 15% per year. They are growing EPS at 30% per year, like double the growth rate. For a valuation that is quite similar. The forward P/E ratio of FICO is 20. So, FICO valuation of 20, but they grow 30% per year. Booking Holdings valuation of 16, and they grow 15% per year. It's about comparing the opportunities.
So, for the moment, I am seeing better at the current market, but Booking Holdings is a very good company. I think shareholders will be very happy if they buy the deep as it drops. Because we are in front of a asset-light compounder. It seems like they know what they are doing. Extremely simple, and they have already rewarded all their shareholders. Most of the time, companies that have rewarded shareholders will continue to reward shareholders in the future. That's in their DNA. And as I showed you before, the tone of the management team, the tone of the slide deck, the vision, the mindset is very simple. I think it will work. So, I like a lot, actually. Booking Holdings is a company I like a lot, but for the moment, I see better opportunities. Okay? If I didn't have other opportunities, maybe I would be a buyer. So, it's not about price. It's not about valuation. It's just a matter of opportunities at the moment. Okay?
Now, the stock is dropping because of geopolitical conflicts, most importantly, but also AI. What if you can book your flight using ChatGPT and only ChatGPT, and you never have to pay booking.com? For the moment, it's not happening for several reasons. Why? Booking, Expedia, they're all working as a plugins to ChatGPT. So, they are they have a partnership. It's not as if ChatGPT would steal their customers, right? They have partnerships like inside the LLMs. You can use Booking Holdings.
Two, as I told you before, I think AI will help customers to recommend hotels, recommend agencies. They will not book flights for you. For the moment, it's not happening happening. Because you have an hallucination rate of a few percentages. What if the LLM does the exact opposite of what you wanted? And what if the LLM is using your credit card to buy your plane tickets, but the timing of the plane plane is off? What if instead of booking for four people, it books for two people only? It's bad. So, as long as you have an hallucination for LLMs, it will be very difficult to uh give them complete access to everything you wanted with your credit card, etc.
Now ChatGPT just had a partnership with Visa to put your credit card. ChatGPT Sam Altman, he has been he had been talking about uh credit card inside ChatGPT for 3 years now, since 2024. 2024, 2025, 2026. So, they've been working together for 3 years to add more cyber defense, cyber security to allow people to put their credit card on ChatGPT. So, you can pay with an AI agent. For the moment, it's not happening. For the moment, it's just uh speculation, but it is moving along. But as long as you will have an hallucination rate of a few percentages, I don't think it will work.
So, the AI threat for the moment is not happening. But the AI tailwind for Booking.com is not happening either. So, maybe the only reason why Booking Holdings is down year-to-date, down 20%, is because of geopolitical conflicts. So, only temporary. So, maybe it is cheap. Okay. I like the the the opportunity here. Booking Holdings, you don't have a lot of opportunities to buy on the dip. I mean, the last dip we had was in 2022, as you saw based on the valuation. And if nothing happens and travel picks up, the valuation can grow again from a forward P/E ratio of 15 to 20 to 25. Life is good, right? So, maybe deserves around 20. So, maybe it's cheap. Okay.
I hope this video was helpful to you. I will let you know if I buy the company in the future because it's a company that is very simple that I like. For the moment, I see better. So, I'm not a buyer at current levels, but I will let you know if I buy. I hope this video was helpful to you. I see you tomorrow.
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