PCLN - Priceline Group Inc.

[vinod1]

Surprised as well. Swapped out of FFH to BKNG yesterday. Hoping it would go down more.

 

Vinod

[scorpioncapital]

Well if you want to get away from the coronavirus on some secluded tropical island or even a small town in your own country, booking can take you there )

[A Dhandho Investor]

Starting to get really interesting, currently at its 52-week low and prices not seen since 2016.

[scorpioncapital]

The past lows have no relation to the current or future stock price.

[A Dhandho Investor]

Can you elaborate on that? I know that we are all value investors, price is what you pay, value is what you get and yada yada.

 

I'm mostly a microcap investor because (1) I don't think I am smarter than the next guy (2) in microcaps there is a lot less competition due to the lack of liquidity and (3) I believe markets are more efficient for large cap stocks

 

However, I do believe that BKNG is a high quality stock that might have been punished too much in the current market environment.

- Will 2020 be the worst year compared to the former 5 years? I think so.

- Is BKNG's financial situation sound enough to whether this crisis? I think so. They have 8b long term debt and 7,5b in cash and marketable securities, so they won't go out of business due to this.

- Is BKNG's business model broken? No

- Will 2021 look like 2020? No, probably more like 2018 or 2019.

 

So with this one-time hickup you can buy a qualitative stock at its 5 year low. Sounds interesting enough to me, but I have to admit that I need to do more due diligence on this.

[sleepydragon]

If you look at large companies with ROE more than 40%, 0 or little net debt, trading at less than 15 PE, and still have revenue growth, this is probably one of the very few.

 

[A Dhandho Investor]

Yeah indeed. My finance professor used to say that the annual earnings of a company only make up 10% to 15% of the total market value of a company, so if this is a one-year hick-up, a 50% correction makes no sense at all, even if you assume they have negative earnings and free cash flow this year.

[sleepydragon]

Staying at home drive people nuts.

People will have to travel. And there will be some bend up demands.

Booking online and not having to deal with travel agents are so convenient people will use it more.

Google will have to hire an army of customer service employees in order to compete with bkng

 

[KCLarkin]

If you look at large companies with ROE more than 40%, 0 or little net debt, trading at less than 15 PE, and still have revenue growth, this is probably one of the very few.

 

Travel will take longer to recover than other sectors, so I am hoping to buy this on sale later.

 

One consequence of the coming wave of bankruptcies could be the European hotels being consolidated by a stronger player or private equity.

[scorpioncapital]

Airbnb has has huge losses and may cancel the ipo. I think we can write this year off followed by a recovery that is also subdued. I don't know if we will see a 4 billion fcf year from booking anytime soon.

[BRK7]

Here are a decent presentation and a blog post on Booking Holdings from Ensemble Capital:

https://intrinsicinvesting.com/2020/01/27/booking-holdings-playing-nice-with-the-google-monster/

 

Depsite their making a good case, and the current pricing, I cannot get comfortable with their thesis that Google Hotels won't aggressively disrupt Booking's model. Maybe if I owned Alphabet, as they do, I could get a little more comfortable, but without an a well designed and expensive loyalty program (which I think is unlikely for the moment given how much management compensation depends on next year's EBITDA growth), why would users not just switch to using Google Hotels?

 

The MOI YouTube presentation demonstrates that competitors Expedia & TripAdvisor drive traffic to their sites via FREE (SEO) links, whereas Booking drives (and has historically driven) it's traffic via PAID search.  The presenter makes the case that this is Booking's moat: "paying Google protects [booking] from the competition." 

 

Maybe I'm misunderstanding the situation here, but I don't see a moat in this particular aspect of Booking's business--for the simple reason that Google would be happy to take more paid search $ from Expedia & TripAdvisor.  If, as the presenter suggests, the ROI on free search has suffered due to the introduction of Google-Travel, why wouldn't Expedia & TripAdvisor simply shift strategy and start allocating more $ to paid Google search?  It seems inevitable.

 

Sure, the margins at Expedia & TripAdvisor might suffer if their customer acquisition costs increase, but it would also be a negative for Booking because Booking would have more competition in this important customer acquisition channel.  In other words, Booking's spend with Google would likely have to increase in order to maintain its relative ranking within the Google search universe. 

 

Google is the obvious victor in the above scenario.

 

Booking has been very successful over time and I'm not questioning that they have a strong business model, but I just don't see a sustainable competitive advantage in this aspect. 

 

Thoughts?

[RVP]

Google would love to take more paid search $, but not all companies are able to/ should be doing paid search. At the end of the day you can only make money if you have supply/service to sell.

 

Something like a TripAdvisor simply doesn't have enough supply (at least on the hotel side) to make paid search worth it. Their hotel side business model was more akin to Google, where the OTAs would spend $ to appear on their sites. So Google's move, at least the way I see it, is to choke off potential alternate advertising platforms (TRIP, TRVG, etc.) to capture more of the travel ad spend.

 

In regards to Google cutting out OTAs like BKNG and EXPE, it's unlikely. Google already commands superior economics in the relationship. They need not spend a dime to grow with the OTAs and capture travel spend. Going the OTA route would involve incurring high costs to hire and maintain workers to facilitate each booking.

 

BKNG's moat is their supply scale (particularly in fragmented Europe) and first mover advantage. This enables them to outspend competitors via paid search. Which then enables them to further increase their supply/ improve their brand. Absent a change in customer interface platform (website, apps) or deep-pocketed competitors willing to sustain meaningful losses for a long time, the flywheel looks intact. 

[BRK7]

RVP, thanks for your reply; I generally agree with what you’ve written—in particular, that Booking’s moat is actually in supply scale and first mover advantage. 

 

That said, it seems likely that, going forward, Booking will be increasingly competing with (for example) Expedia in terms of paid search dollars to Google.  This is not catastrophic for Booking, but I believe it is a negative development to some unknown degree.

 

I’m not terribly worried about Google becoming a head-to-head competitor with OTAs.  If I thought it made sense for Google to do so, I wouldn’t even take a second look at BKNG (except possibly to short it). 

 

On an unrelated note, I’m wondering to what extent the COVID-19 pandemic disproportionately impacts the smaller “independent” hotels (vs the large chains) which are so important to the investment thesis.  In other words, some of this “supply” might be eliminated, which is not a temporary setback.

 

Again, I'm not disputing the strength of Booking's business model, but rather trying to get a better handle on the risks.

 

[RVP]

I fully agree that there will be headwinds in the short/ mid term from COVID-19. I'm less convinced the elimination of smaller independent supply will be a permanent setback. I think the key consideration is how travel demand recovers and grows going forward. As long as the secular trend in global travel remains intact, supply will come back (albeit ownership may change hands in between).

 

Margin pressure from increased marketing is not very clear to me. Perhaps more marketing dollars to Google, but at the same time I would imagine they would pull back from spend in meta-search if it becomes clear those avenues become less effective. Also, it's not a guarantee that Google's ad rates per impression/ click remain immune at recent levels perpetually.   

[bizaro86]

Why would it disproportionately affect smaller hotels? I dont think large chain hotels will be less affected, and they have an extra layer of overhead (brand fees). Large convention type hotels seem likely to be the most affected to me.

 

From a financing point of view, a local bank that owns a mortgage on a small property seems at least as likely to grant forbearance as the special servicer on a CMBS mortgage. Probably more.

 

Finally, even bankruptcy wouldn't take that supply out of the market. The small hotel supply is made up of buildings not balance sheets. If the loans default the buildings will still be there. There might be new owners for them to sign up, but the brands wont be any more attractive to the new owners than the old owners.

 

Also, I think it's likely airbnb competition will decline. An apartment that was being rented out that goes through bankruptcy is more likely to get repurposed to long term residential use.

[scorpioncapital]

There really is little distinction between short and long term apartments. It's all temporary. When you close borders of course you must rent long term to locals. But this is just shifting local population around. There's no external demand. That would lower prices .

[Jurgis]

Why would it disproportionately affect smaller hotels? I dont think large chain hotels will be less affected, and they have an extra layer of overhead (brand fees). Large convention type hotels seem likely to be the most affected to me.

 

From a financing point of view, a local bank that owns a mortgage on a small property seems at least as likely to grant forbearance as the special servicer on a CMBS mortgage. Probably more.

 

Finally, even bankruptcy wouldn't take that supply out of the market. The small hotel supply is made up of buildings not balance sheets. If the loans default the buildings will still be there. There might be new owners for them to sign up, but the brands wont be any more attractive to the new owners than the old owners.

 

Also, I think it's likely airbnb competition will decline. An apartment that was being rented out that goes through bankruptcy is more likely to get repurposed to long term residential use.

 

Good points.

[BRK7]

Compared with smaller independents, larger chains typically have greater access to capital markets as well as greater diversification, in terms of geographic location of their lodging assets (i.e., well-performing locations can subsidize under-performers). 

 

If a small independent hotel gets wiped out due to prolonged period of low occupancy, here are a few scenarios:

 

A) Larger hotel chain buys the building, gives it a makeover, and folds it into their existing, branded network. 

B) Independent hotel re-opens under new independent ownership, but likely has to “re-establish” its reputation/branding/rating to an extent. 

C) In some cases, bankruptcy COULD take supply out the market—e.g., building gets repurposed as nursing home, executive suites, etc.—though I’m not unduly worried about this possibility.

 

The point is that some of these independents are going to get wiped out, and, on balance, I think this is a negative for Booking.  Not a thesis-breaker, but something to be aware of.

 

[BRK7]

French gov't institution (together with "tourism industry") to build platform to complete with Airbnb, Booking:

 

https://www.bloomberg.com/news/articles/2020-05-14/france-to-build-online-platform-to-rival-airbnb-booking-com?sref=DWzi38c2

 

https://seekingalpha.com/news/3574572-airbnb-booking-getting-new-competitor-in-france?utm_medium=email&utm_source=seeking_alpha&mail_subject=bkng-airbnb-booking-getting-new-competitor-in-france&utm_campaign=rta-stock-news&utm_content=link-1

 

Wondering what you guys think of this development?

[scorpioncapital]

It seems to be for the domestic market first and then maybe eu. IT will be interesting to see what is the reproduction value of acquiring all their partners. In other words , can a startup create something as powerful as 55 billion booking and 35 billion Airbnb for a fraction of that cost. Success would mean there is no moat as the big players claim. Failure would tend to further the view that it's easier said than done.

[LearningMachine]

Is anyone else here not worried about their history of dilutions still going on?

 

For context, they went from 38 million shares outstanding on Feb 15, 2008 to 40 million on Feb 13, 2009 (talk about printing shares at the bottom) to 53 million by 2014.  Some of it was for acquisitions but they have also been printing shares to give free shares to themselves, to give to Wall Street convertible bond purchasers, and to management of companies they acquire.

 

Even though they have been buying shares in the past few years to reduce impact of dilution at a high cost, they haven't stopped printing shares to give shares to themselves and to convertible bond purchasers on wall street.  For example, on April 8, 2020, they announced more convertible bonds.  In their 2019 annual report, they list $3 Billion worth of convertible bonds that will automatically print new shares.  $1 Billion of those will print shares at $945 per share.

[scorpioncapital]

In principle, issuing shares as you grow (or anticipate to grow ) your business is perfectly fine. I think if you look at those years you will see quite an expansion. However I do agree that now is different. They are not growing. Dilution now is more of a necessity , in particular due to over zealous buybacks, which is never a good thing. I've seen several companies buyback too many shares and now probably regret not having capital to grow and for financial strength