My three best stocks to bet on a recovery in travel are Booking Holdings Inc. (NASDAQ:BKNG), Expedia Group, Inc. (EXPE) and Airbnb, Inc. (ABNB). The preferred pick among the three names is BKNG, because its shares have been over-penalized for its relatively larger exposure to Europe and its below-expectations profitability guidance.
Travel Stocks In 2021
The travel-related stocks didn’t do that well in 2021, if one uses the performance of the ETFMG Travel Tech ETF (AWAY) as a proxy for the travel sector. AWAY declined by -4% from $25.36 as of January 4, 2021 to $24.37 as of December 31, 2021, while the S&P 500 was up by +29% last year.
On the ETF’s website, AWAY is described as “a portfolio of companies” which “are engaged in the ‘Travel Technology Business’ by providing technology via the internet and internet-connected devices to facilitate travel bookings and reservations, ride sharing and hailing, travel price comparison, and travel advice.”
Year-to-date, the ETFMG Travel Tech ETF continued its decline from last year, decreasing by -5.3%, but AWAY did slightly better than the S&P 500 which decreased by -6.1% in 2022 thus far.
ETFMG Travel Tech ETF’s 2022 Year-to-date Performance
Although travel stocks have underperformed in 2021, they look poised for a strong recovery in the intermediate term. This is backed up by insights from Criteo’s (CRTO) recent March 18, 2022 article, which highlighted that “US air bookings during the week ending March 13 (2022) were 1% above pre-pandemic levels” and noted that “February (2022) suitcase sales shot up 56% compared to one year prior.” I do acknowledge the potential risks relating to new COVID-19 variants and the Russia-Ukraine war spreading to other parts of Europe. But I am of the view that travel stocks in general offer good investment opportunities for the medium to long term, as these headwinds (e.g. pandemic, geopolitical conflicts etc) are expected to ease in time to come.
For the remainder of this article, I write about three travel stocks, namely Booking, Expedia and Airbnb, which also happen to be among the top 10 holdings for the ETFMG Travel Tech ETF. Booking and Expedia are the top two OTAs or Online Travel Agencies globally. Research service provider Morningstar differentiates between BKNG and EXPE, by referring to the former as “the world’s largest online travel agency by revenue”, while describing the latter as the market leader in the global OTA market by “bookings.” In comparison, Airbnb is the leading company in the alternative accommodations space.
AWAY’s Top 10 Holdings As Of End-February 2022
Booking Is A Laggard That Should Play Catch-up
The largest global OTAs, Booking and Expedia, are the best proxies for betting on an eventual recovery in global travel. Between the two, BKNG appears to be the clear laggard. Using the January 2, 2020 share prices of the two companies as a gauge of pre-pandemic price levels, Expedia’s shares have gone up by +71% from $110.98 as of January 2, 2020 to $190.18 as of March 21, 2022. In contrast, Booking’s stock price has only increased by +4% from $2,074.58 to $2,161.39 over the same period.
In 2022 thus far, Booking has also underperformed both EXPE and ABNB (pre-COVID comparison is not relevant for Airbnb as it was only listed in December 2020) as per the chart below.
Year-to-date Share Price Performance For BKNG, EXPE And ABNB
There are three key reasons why I think that Booking’s shares are very likely to rise going forward and narrow the share price performance gap between itself and its peers.
Firstly, BKNG has been hurt by its relatively larger exposure to the European travel market which does face higher risks due to the ongoing Russia-Ukraine war. In the company’s FY 2021 10-K filing, Booking disclosed that it generated 87% of its revenue from non-US markets, with Europe accounting for 48% of its total staff. On the flip side, Expedia is more US-centric and has more than three-quarters of its 2021 top line derived from the US as per S&P Capital IQ data. Airbnb has a more even geographic split with US and non-US markets each accounting for about half of its revenue earned last year.
However, Booking actually has a very limited exposure to the current Russia-Ukraine war. BKNG revealed at its recent Bank of America (BAC) Consumer & Retail Technology Conference on March 8, 2022 that Ukraine and Russia in aggregate are a “low single-digit percentage of our total bookings” and also mentioned that Eastern Europe is a “high single-digit percentage of our total bookings.” Assuming that the current war between Russia and Ukraine does not spill over to other parts of Europe in a big way or even shows signs of coming to an end in the future, Booking’s share price could potentially rebound strongly going forward.
Secondly, Booking’s guidance for “EBITDA margins in 2022 to be a few points higher than we were in 2021” provided at its Q4 2021 results call came in below what the market was expecting. BKNG explained at the Bank of America conference in early-March 2022 that the lower-than-expected EBITDA margin guidance for FY 2022 was attributable to both a “timing gap” and higher marketing spend “to lean into a recovering travel marketplace.”
The first factor is a timing difference that is temporary in nature, and BKNG emphasized at the BAC conference that this was “something that when the growth rates normalize, you kind of get back to that (i.e. normalized margin recovery).” The second factor sends a strong signal that the company is investing more aggressively to capitalize on opportunities that are emerging as part of the eventual travel market recovery, which should be seen as a positive.
Thirdly, the market has not given Booking sufficient credit for its ability and willingness to return more excess capital to its shareholders.
I estimate that BKNG still has approximately $9.9 billion remaining from its current share buyback authorization, after spending approximately half a billion dollars on share repurchases in the first two months of 2022 as disclosed at its fourth-quarter earnings call. At the call, Booking guided that it hoped to continue with the $9.9 billion worth of share repurchases in the coming three years. The $9.9 billion remaining share repurchase authorization is significant, being equivalent to around 11% of Booking’s current market capitalization.
In conclusion, I think that BKNG has multiple re-rating catalysts such as a faster pace of share repurchases, results of increased marketing spend paying off in the form of better-than-expected revenue growth or market share gains, and the eventual resolution of the geopolitical conflict between Russia and Ukraine.
In the subsequent sections, I discuss the other two travel stocks, Expedia and Airbnb.
Expedia Is More US-Centric And Relatively Cheaper Compared To Peers
Expedia Group is also one of the leading OTAs alongside Booking, as I mentioned earlier in this article.
There are two key factors that make EXPE a good alternative to BKNG as a proxy for the recovery in travel. One key factor is that Expedia derives over 75% of its fiscal 2021 revenue from the US. For investors who hold the view that geopolitical conflicts in Europe are going to get worse, but that the COVID-19 situation is improving, they could prefer Expedia over Booking. The other key factor is relative valuations. Expedia is valued by the market at consensus forward next twelve months’ Enterprise Value-to-Revenue and EV/EBITDA multiples of 2.9 times and 13.5 times, respectively as per S&P Capital IQ data. As a comparison, Booking trades at 5.3 times consensus forward next twelve months’ Enterprise Value-to-Revenue and 17.3 times consensus forward next twelve months’ EV/EBITDA.
On the flip side, EXPE’s share price has increased substantially by +71% vis-a-vis its pre-pandemic price levels which I highlighted earlier. Expedia has put in significant efforts in cost restructuring in the past few years, and the market consensus (as per S&P Capital IQ) expects Expedia’s EBITDA margins to improve from 17.7% in FY 2019 (pre-COVID) to 21.7%, 23.3%, and 24.4% for FY 2022, FY 2023 and FY 2024, respectively. But Expedia’s good stock price performance in the last two years suggests that its expected profitability improvement in the coming years has been priced into a large degree. Furthermore, EXPE does deserve to be valued at lower multiples as compared to BKNG which boasts higher consensus forward EBITDA margins above 30%.
In a nutshell, leading OTAs are a good way to play the travel recovery, but I prefer Booking over Expedia.
Airbnb Is A Play On Change In Travel Behavior
Going back to Criteo’s March 18, 2022 article which was referred to earlier, the firm’s Shopper Story 2022 research report found that “travelers are planning more trips that allow room for flexibility” with roughly 50% of them intending to “take more day trips, weekend trips, and domestic vacations” as opposed to “overseas vacations.” This is a favorable trend for Airbnb which is focused on alternative accommodations.
A key driver of increased flexibility for travel is likely to be the shift toward remote work which has been accelerated in a big way by the coronavirus pandemic. A March 7, 2022 Harvard Business Review piece noted that “recent surveys show that 91% of remote employees would like to continue their hybrid or remote working.” Also, ABNB stressed at the recent Morgan Stanley (MS) 2022 Technology, Media & Telecom Conference on March 10, 2022 that “half our business now is for longer than a week” and emphasized the homes offered on Airbnb’s platform are likely to be preferred over hotels when people decide to go for longer-duration trips.
But ABNB is priced for perfection to quite an extent. According to financial estimates sourced from S&P Capital IQ, it is currently trading at consensus forward next twelve months’ EV/EBITDA and Enterprise Value-to-Revenue multiples of 45.6 times and 12.2 times, respectively. If the current trends regarding the change in travel behavior does not persist or traditional OTAs make a bigger move into alternative accommodations, Airbnb’s share price might come under some pressure in the short term due to valuation multiple de-rating. That said, ABNB is still the best listed proxy for the alternative accommodations segment of the travel market.
Nevertheless, BKNG remains my favorite travel stock pick, considering various factors such as the relative attractiveness of the different stocks in terms of valuation and the presence of re-rating catalysts.
The bottom line is that travel stocks should perform better in 2022 taking into account positive indicators in terms of airline bookings and luggage sales. My favorite travel stock is Booking, as I think that the company’s shares are mispriced and there are catalysts in place to eventually correct this mispricing.