BKNG
BKNG is our preferred player in the OTA space given its more streamlined operation and considerable scale, which collectively serve as a material competitive advantage within what is otherwise a largely commoditized space. The talk of "structural OTA headwinds" in late 2017 lacked any substance, which we detailed within our OTA deck from December. But even if structural headwinds were mounting, we think that's more likely to occur here in the US than overseas, making BKNG more immune to exogenous threats (Hotel brands, Airbnb, other competition from intermediaries). Granted, BKNG had a relatively rough 2017, but that was mostly a function of discrete events that inflated BKNG’s 2016 room nights, which consensus failed to factor in to their 2017 growth estimates. The 2018 setup is much cleaner, and we also now believe that mgmt has greater control over its own story given what may be a sea-change in ad efficiency. Per Hedgeye GLL forward looking data, the global travel set up looks poised for another strong year, and our BKNG volume tracker suggests an inflection in room-night growth could be coming as soon as 2Q18, which mgmt may flag in its upcoming guidance. See the deck/replay below for supporting detail/analysis on our Long thesis.
BKNG Deck & Replay - CLICK HERE
YELP
YELP'S model is predicated on driving new account growth in excess of its rampant attrition, which we estimate is the overwhelming majority of its accounts on an annual basis. YELP’s ability to do so moving forward is a growing concern given what we expect to be a new baseline in elevated attrition rates against y/y declines in its core salesforce-driven new account growth. We see YELP's decision to allow its salesforce to sell w/o contracted term lengths as a short-term band-aid that will likely accelerate its blowup since doing so is basically the equivalent of pulling the goalie; It greases the wheels for gross adds, but exposes itself to heightened churn risk at the same time. However, this creates a potentially dangerous setup on the short side into this print given the way YELP reports its accounts (PAAs), which is any account that paid YELP during the quarter, regardless of whether they have already churned off. That said, it's possible that YELP could report a surge in 1Q18 net adds since this is the first full quarter that YELP's reps will be selling w/o contracted term lengths, yet we will not see any intra-quarter churn of 1Q18 gross adds until its 2Q18 results. The key metric on this print will be ARPA, which should give us a loose read into churn dynamics. However, this is likely only a 1-quarter risk on the short side. Without contracted term lengths, this quarter's account wins likely becomes next quarter's churn, and so and so forth until YELP pulls so many gross adds forward that it can't comp the comp (i.e. declining net PAAs). Either way, we estimate that 2H18 estimates will be a stretch regardless, so any potential squeeze off this print would likely be short-lived.
Let us know if you have any questions or would like to discuss in more detail.
