January 17, 2020 - 5:43am EST by
2020 2021
Price: 2,055.00 EPS 0 0
Shares Out. (in M): 42 P/E 18x 0
Market Cap (in $M): 86,000 P/FCF 0 0
Net Debt (in $M): 1,670 EBIT 0 0
TEV ($): 87,670 TEV/EBIT 0 0

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Booking Holdings is a global leader with a strong competitive advantage in a growing industry. Despite this, the stock price today is barely higher than it was two years ago, and the multiple much lower. This long-time market darling seems to have fallen out of favour owing to fears of increased competition from Google, push-back from hotels and European macro concerns. We believe these concerns are misguided.


Booking Holdings was founded in 1997 as In 2004-2005 the company acquired the corporate parents of two European hotel booking sites ( and for a sum of $294m, and combined them to create, Europe’s largest online travel agent (OTA). Today, Booking Holdings has operating profits in excess of $5bn almost entirely due to, making these acquisitions some of the most successful in recent corporate history. Glenn Fogel, who spearheaded both acquisitions for Priceline, has been CEO of Booking Holdings since early 2017. achieved dominance in Europe by focusing on what is known in the industry as the agency business model. In the agency model, consumers make a hotel booking online but pay nothing upfront. Instead, they pay the hotel directly at the end of their stay. A commission then gets passed on to from the hotel. This contrasts with the merchant model, which was the prevailing model in America in the mid-2000s. Under the merchant model, the consumer pays the OTA upfront when making the booking, hence the OTA is the merchant of record. In this model, the hotel determines the price for each room, known as the “net rate”, and the OTA marks up this price to a “retail rate”, which it charges to consumers. Importantly, the OTA holds the consumer’s entire payment amount from the point of booking until the point of stay and only passes on the net rate amount to the hotel after the stay is complete. Thus, the merchant model has a much more attractive cash flow profile than the agency model, allowing the OTA to profit from a substantial float.

Expedia dominated the American OTA market throughout the 2000s using the merchant model. When the company expanded into Europe, however, it struggled to gain the same foothold; Europeans were not used to paying upfront for hotel rooms and lacked trust in internet payments. Moreover, Expedia was effectively charging c. 25% commission vs’s 15%, making the American contender a much less attractive proposition for hotels looking to dip their toe into online sales. had never known fat margins of the kind Expedia had been enjoying in the US but was still nicely profitable on 15% commissions while growing revenue at hundreds of percent. Given this trajectory,’s management were happy to pass up the cashflow advantages of the merchant model and stick with the agency approach, which better suited both their hotel partners and hotel customers. Expedia’s leadership, by contrast, were reluctant to lower their margins and give up the cashflow advantages of their own model. Hence, in a classic case of the innovator’s dilemma, the world’s largest OTA ceded its lead to by 2010. Expedia would eventually lower its margins and start offering an agency model option, but by that point had firmly established a dominant position within Europe. Today, Booking Holdings has a market capitalization in excess of five times that of Expedia.

Moat and bear case

Despite missing its opportunity in Europe, Expedia remains the market leader in the US. Official market shares are not known, but by our estimates Expedia is more than three times the size of Booking Holdings in the US whilst Booking Holdings is more than four times the size of Expedia in Europe. This raises the question: why is the European OTA market so much more valuable? The key is in the relative consolidation profiles of the two accommodation markets.

In the US, over two thirds of hotels belong to one of the major chains, whereas in Europe, this dynamic is reversed, with roughly two thirds of hotels remaining independent. The US abounds with large, 100+ room hotels belonging to flagship, homegrown hotel franchises such as Marriott and Hilton. Europe, by contrast, has many independent hotels, typically only 10- 50 rooms apiece, which are ill suited to consolidation within a major franchise.

Franchised hotels benefit from the brand and marketing prowess of their deep-pocketed corporate partners. Independents, by contrast, have none of these resources so can receive considerable value by signing up with a large OTA. has over 20 years’ experience in marketing hotel inventory online. Millions of cumulated A/B tests lie behind its ability to engineer the precise page layout, language, and booking process that will result in maximum conversion of consumers browsing its site.’s offering is backed by thousands of software engineers, marketing experts and customer service representatives whose sole focus is to drive online bookings and optimize the consumer experience on behalf of its partners. A 30-room hotel manager, with a small staff roster, would have little hope of achieving comparable results unassisted. As such, can charge a relatively high commission (c. 20%, according to our research) and still offer considerable return on investment to independent hotels.

Like many leading internet businesses, benefits from powerful network effects. As more hotels sign up to and supply more room inventory, the site becomes increasingly useful to consumers, leading to more consumer traffic, which in turn makes more attractive to hotels and so on in a virtuous circle. This is a key aspect of’s moat. can then use its scale to outspend its competitors on marketing, which further buttresses its competitive advantage. Booking Holdings spends over $4bn on performance marketing a year, mostly on Google ads. This dwarfs every other OTA, with the exception of Expedia, which reportedly spent $3.5bn on Google ads in 2018. Increasing influence from Google is a key bear case against the OTAs but it’s worth noting that Booking Holdings and Expedia’s collective Google spend of $7-8bn comprises a non-trivial amount of Google’s total advertising revenue ($116bn in 2018). This is all high-margin business for Google. If Google wanted to disintermediate and become a full-service OTA, it would have to do much more than provide an online hotel booking portal. It would need to replicate’s nearly 25,000 staff, who manage hotel partnerships and provide round-the-clock customer service. Google/Alphabet’s own employee headcount is a little over 100,000, therefore this would represent a c. 25% increase in staff. Given the very profitable nature of Google’s current relationship with the OTAs, such an investment would not make good business sense, even if it were allowed by regulators, which is very doubtful in Europe.

“Google Hotels” offers an alternative way in which Google/Alphabet can prove disruptive to the OTAs. The site offers a form of metasearch, directing Google users towards competitor OTAs or to hotels’ websites directly (hotels still have to pay Google for this advertising). This adds an extra step to the conversion process and therefore another touch point at which could lose some custom. is not entirely dependent on Google, however, since over 50% of’s website traffic comes direct to its website and its app. This percentage has been increasing over time and management is focused on finessing its level of Google advertising versus brand marketing spend so as to maximize its return on investment.

Another bear case argues that OTAs will lose ground as hotels gain traffic directly from consumers. The earnings calls of the world’s largest hotel chains for the last few years have been replete with management plans to improve their direct share of online bookings. These initiatives have done little to move the needle on OTA share, however. At the five largest hotel chains in the world, the share of room revenues sourced from OTAs (currently between 10% and 25%) continues to grow.

Notwithstanding this resilient revenue share, large hotel chains have been steadily putting pressure on OTA commission rates over time. Increased consolidation, such as the recent merger between Marriott and Starwood, has exacerbated this trend. Official commission rates are not public, but our research suggests that Hilton and Marriott have been able to negotiate commission rates as low as 10-12% with OTAs, nearly half of the rate independents pay.’s heightened exposure to Europe and independent hotels proves rather advantageous in this context and explains how’s agency commission rate has been able to increase steadily over the last decade despite global consolidation amongst the large chains.

Growth and valuation’s historical growth has been explosive – gross bookings have grown more than ten-fold in the last ten years. Despite this expansion, online bookings still only account for between 40% and 50% of all hotel bookings worldwide. This pattern holds true globally, with estimates suggesting that no major region yet exceeds 50%. By contrast, online airline ticket bookings have reached c. 70% penetration worldwide and hotel bookings for business travel have already reached 80-90% online penetration in the US. This suggests significant runway remains for online accommodation penetration to increase. Coupled with the continued global growth in tourism volumes (which have been growing in excess of 3% annually), this allows for mid to high single digits growth for over ten years, which would comfortably justify the stock’s 18x forward P/E multiple.

It is worth noting that France, Spain, Italy, Turkey, Germany and the UK all frequently rank in the top 10 most visited countries in the world. As developing economies expand, their growing middle classes have demonstrated continued interest in visiting the unique historic cities and cultural centres of Europe. For this reason,’s outsized dominance in European markets should prove a structural advantage for many years to come.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Google seen to have limited impact over time

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