Booking's Stock Now Presents an Intriguing Long-Term Opportunity
After tumbling 11% on Thursday thanks to its results and guidance, Booking Holdings (BKNG) is trading at levels it first hit about two years ago, and also at forward multiples that are easily below the ones it sported for most of 2018.
Though analyst estimates have been lowered post-earnings, Booking, whose travel brands include Booking.com, Priceline, Agoda and Kayak, now trades for 16.8 times a 2019 EPS consensus of $100.80 and 15 times a 2020 EPS consensus of $113.41. For the biggest player in an online travel industry that has plenty of long-term growth left, those look like pretty reasonable multiples.
Booking's Q4 report was admittedly disappointing. Though revenue was roughly in line with estimates and EPS beat with the help of a lower tax rate, gross travel bookings of $19.55 billion (up 9% annually and 13% in constant currency) missed a $19.76 billion consensus. And perhaps more importantly, Booking's Q1 revenue, EPS and bookings outlooks were all below expectations.
Both travel bookings and non-GAAP revenue are expected to be down 1% to up 1% in dollars and up 5% to 7% in constant currency (CC) in Q1. In addition, management forecast on the earnings call that investments in areas such as branding, customer acquisition and Booking's payments platform (it launched in late 2017) will pressure 2019 EBITDA growth by "a few percentage points." The company does nonetheless expect non-GAAP EPS to grow by a low-double digit percentage in CC this year, but with currency swings a strong headwind for Booking, dollar-based EPS growth might be in the single digits.
In addition to new investments and forex swings, some other factors are hurting Booking's near-term guidance. The company expects about $65 million in revenue to be pushed out from Q1 to Q2 due to the fact that Easter arrives three weeks later in 2019 than it did in 2018. The company also reports seeing some macro headwinds in Europe, which accounts for a large portion of its bookings.
At the same time, there are still several industry trends and company-specific strengths that position Booking to see healthy top-line growth over the long run. Chief among them:
- Global travel spending growth has been outpacing global GDP growth. Rising travel spend among emerging markets consumers is helping, as is the willingness of many younger consumers in developed markets to spend heavily on travel.
- Online travel bookings continue to steadily take share from offline bookings. And there's still quite a lot of offline spend left to move online, particularly outside of the U.S.
- Emerging markets in the Asia-Pacific region present a large growth opportunity for Booking. The company's Agoda brand is a major player in Asia, and a string of investments and partnerships have helped it cater to Chinese consumers looking to travel overseas.
- Relative to archrival Expedia (EXPE) , Booking still has a small market share in the huge U.S. online travel market. Though admittedly, one could say the same about Expedia's share relative to Booking's in Europe.
- With the help of its new payments platform, Booking's hotel bookings mix is increasingly shifting from agency sales (buyers pay at the time of a visit, with Booking then collecting a commission) to merchant sales (Booking purchases blocks of hotel rooms on a wholesale basis, resells them online and is paid up-front, with the hotel owner paid at the time of a stay). In addition to improving Booking's cash-flow profile, the shift to merchant transactions gives Booking opportunities to upsell customers on additional travel services.
- Booking's "alternative accommodations" business, which covers things like home, apartments and vacation rentals provided by consumers, is booming. The business posted 2018 revenue of about $2.8 billion (20% of total revenue), with quarterly sales topping $1 billion for the first time in Q3.
- Booking has been very good at optimizing its considerable advertising spend, much of which is directed towards Alphabet/Google (GOOGL) search ads. Last year, Mizuho Securities estimated that Booking spent $6.50 per room night sold on marketing in 2017, and that Expedia and TripAdvisor (TRIP) respectively spent $9.80 and $8.80.
For now, these growth drivers and competitive strengths are being overshadowed by Booking's near-term sales and profit headwinds. And that arguably creates an opportunity for long-term buyers willing to ride out the storm.
Microsoft Is a Potential Culprit as Box's Numbers Disappoint
Feb. 28, 2019 | 2:18 PM EST
In fields as varied as business apps, cloud infrastructure services, database software and augmented reality hardware, Microsoft (MSFT) has been demonstrating impressive execution lately, as Satya Nadella & Co.'s attempts to overhaul the software giant's culture and react more quickly to major tech trends keep paying off. Enterprise cloud storage, file-sharing and content management software firm Box (BOX) , whose shares are down over 18% post-earnings, might have just become a casualty of those efforts.
Box topped January-quarter (fiscal fourth quarter) EPS estimates, but revenue of $163.7 million (up 20% annually) was slightly below a consensus estimate of $164.2 million. And in what's a seasonally big quarter for Box's subscription billings, the company reported billings of $237.7 million, up 16% and well below a consensus of $254.7 million.
Box also guided for April-quarter revenue of $161 million to $162 million and fiscal 2020 (ends in Jan. 2020) revenue of $700 million to $704 million, respectively below consensus estimates of $169.7 million and $732.8 million. The midpoint of Box's fiscal 2020 revenue guidance range, which admittedly might be a little conservative, implies 15% annual revenue growth, down from fiscal 2019's 20% growth.
Also: Box forecasts its billings will be up by just a low-single digit percentage annually in the April quarter, before "returning to more normalized growth rates for the remainder of [fiscal 2020]." The company blames several one-time factors.
Peer Dropbox (DBX) sold off post-earnings last week. However, Dropbox, whose sales skew more towards individuals and small businesses than Box's, issued above-consensus sales guidance. Unlike Box, Dropbox's selloff had much to do with the company's margin and cash-flow guidance, which is being impacted by its near-term spending plans.
On its earnings call, Box blamed its current sales and billings pressures in large part on "disappointing execution" in the EMEA region and lengthy sales cycles for some 7-figure deals. The company also says one major customer "significantly reduced" its spending upon renewing its deal with Box in February, and that this deal reduction will act as an $8 million revenue headwind in fiscal 2020.
Box does insist its total deal win rates remain stable. However, the company isn't blaming macro conditions for its sales and billings shortfalls, and its numbers come at a time when total enterprise software spending remains pretty healthy. And it's hard to ignore the fact that top rival Microsoft continues seeing strong momentum for its business Office 365 plans, which bundle the company's OneDrive for Business cloud storage and file-sharing platform.
Microsoft's Office commercial products and cloud services revenue, which also includes its legacy Office software license business, rose 11% annually in the company's December quarter. Office 365 commercial revenue grew 34%, with installed seats rising by 27%.
Separately, during a recent Morgan Stanley conference talk, Microsoft exec Dave O'Hara suggested his company is only "sort of at the halfway point or a little past that in terms of moving customers" from traditional Office licenses to Office 365. He also argued there's more room to grow penetration rates for Microsoft's costly E5 Office 365 plans, which among other things comes with unlimited OneDrive for Business storage.
Microsoft and Box, it should be noted, were given the highest rankings in research firm Gartner's 2018 Magic Quadrant report for content collaboration platforms. Microsoft had a slightly higher position on the quadrant's "ability to execute" axis; Box had a higher position on its "completeness of vision" axis.
As Gartner and others note, Box still has some valuable strengths in its fight against Microsoft, as well as against other rivals such as Dropbox and Citrix Systems (CTXS) . Among them: The company has done a very good job of creating advanced security, compliance and content management features for its platform, as well as creating solutions for major verticals such as healthcare and government agencies. It also now has a large ecosystem of third-party apps and services that integrate with its offerings, and is working on a slew of product updates related to content management, security and workflow automation.
But Microsoft has clearly established OneDrive as a serious competitor to Box, and is both undercutting Box's pricing via Office 365 bundles and has been using its tremendous enterprise reach to rapidly grow Office 365 adoption. All of that could be weighing on Box's top line as the company continues battling Microsoft for large enterprise deals.
This post has been corrected to state Box expects its April quarter billings to be up by a low-single digit percentage annually, rather than down by that amount.
