KEY POINTS
- LTM = OWW: As a reminder, we've been stalking BKNG on the long side for the better part of the year, but we've been on the sidelines since consensus wasn't giving BKNG any wiggle room in its forward-quarter room night estimates, hence the four consecutive guidance misses. There is reason to believe that consensus didn't understand what inflated the comps i.e. they weren’t fully compensating for EXPE’s botched integration of OWW. We estimate that EXPE gutted OWW's marketing budget starting in 2Q16, leading to the precipitous deceleration EXPE's room night growth. Those rooms didn't evaporate, BKNG absorbed them. So it was almost as if BKNG was the one who acquired OWW, and has been since been comping against a quasi-inorganic tailwind from 2Q17-1Q18.
- SEA CHANGE IN AD EFFICIENCY? Even though BKNG missed the room-nights guide again, it didn't matter for the stock, which is a first for as far back as we've been tracking the data. We're not sure if the street was responding to the outsized beat in either its 4Q room night growth or EBITDA, or if they understand the gravity of what happened with ad efficiency, which accelerated to its highest level since 2014 while reversing what has been a near secular decline in the metric. It appears that BKNG may be the only OTA to have figured out how to lever brand advertising (e.g. TV), which despite doubling y/y is still only 10% of its total ad spend. Ultimately this means that BKNG's ad spend now has a lot more firepower, which makes it lot easier for mgmt to respond to a shortfall in demand if room-night growth is tracking below estimates.
- BKNG = CLEANEST LONG IN THE SPACE: Note that we were originally planning to go long after this print now that BKNG has fully comped past the OWW share-shift hangover (Point 1), but now the story is even more attractive since BKNG has greater control over its own destiny (Point 2). But the kicker is that 2018 room night estimates have declined to the point where consensus is now assuming a near steady deceleration through 4Q18 on a 2-yr basis. BKNG's 1Q18 room-night guide/miss didn't do enough to temper the street conjecture around "structural headwinds" (see deck below), which creates a nice setup on the long side. If PCLN can stay within a couple percentage points of its current 2-year growth trajectory, its reported room night growth will accelerate back into the 20% range starting in 2Q18. At a minimum, Point 2 alone suggests it should be able to edge ahead of consensus.
See the deck below for our supporting detail & analysis on longer-term OTA thesis. Let us know if you have any questions, or would like to discuss in more detail.
OTAs DECK & REPLAY - CLICK HERE
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
Todd Jordan
Managing Director
@HedgeyeSnakeye
Sean Jenkins
Associate
