Integration Of Generative AI Like AI Trip Planner And Penny Will Improve Efficiency And Attract Travelers

Key Takeaways

• Integration of generative AI and expanded merchant offerings are set to boost operational efficiency, attract travelers, and enhance revenue and net margins.
  
• Growth in the Genius program and the connected trip vision aims to increase customer loyalty and engagement, improving revenue and reducing costs.
  
• Rise of Agentic AI and increased competition may impact revenue, while dependencies on AI partnerships pose risks to margins and operational complexities.

Catalysts

Provides online and traditional travel and restaurant reservations and related services in the United States, the Netherlands, and internationally.

• The development and integration of generative AI across Booking Holdings' platforms, like Booking.com's AI Trip Planner and Priceline's AI-powered travel assistant, Penny, are expected to enhance operational efficiencies, attract more travelers, and potentially improve net margins and revenue growth.
  
• The expansion of Booking.com's merchant offerings presents opportunities for higher contribution margins. As more transactions are processed through these channels, this is likely to enhance both revenue and earnings as the company reduces transaction costs for travelers and suppliers.
  
• Continued growth and enhancements in the Genius loyalty program indicate a potential increase in customer loyalty and direct bookings, which could result in higher revenue and improved net margins due to reduced marketing expenses.
  
• Ongoing investments in the connected trip vision, which simplifies travel planning and booking, are expected to drive increased customer engagement and transaction growth, positively impacting revenue and earnings.
  
• The company's transformation program, focused on cost reductions and improved operational efficiencies, aims to achieve annual savings of $400 million to $450 million, which should bolster net margins and earnings growth over the long term.

Booking Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Booking Holdings's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.8% today to 28.7% in 3 years time.
• Analysts expect earnings to reach $8.6 billion (and earnings per share of $284.67) by about March 2028, up from $5.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.8x on those 2028 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 3.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

Booking Holdings Future Earnings Per Share Growth

Risks

• The rise of Agentic AI platforms may lead to greater competition, with potential for bookings to bypass Booking Holdings entirely, impacting revenue and market share.
  
• Collaborative ventures with large AI companies may pose risks by creating dependencies, potentially affecting margins if the terms of partnerships or competitive landscape shift.
  
• The projected increase in merchant bookings mix might not yield anticipated margin improvements or could lead to operational complexities, which could affect net margins and earnings.
  
• Increases in direct traffic and social media marketing efficiencies are critical for maintaining marketing leverage and margins; however, if these trends reverse, they could pressure earnings growth.
  
• External economic pressures, including a leap year impact on growth comparisons and currency fluctuations, highlight sensitivities in the company's financial forecasts, possibly affecting revenue and earnings predictability.

Valuation

• The analysts have a consensus price target of $5636.976 for Booking Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6500.0, and the most bearish reporting a price target of just $4411.11.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $30.1 billion, earnings will come to $8.6 billion, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of $4471.51, the analyst price target of $5636.98 is 20.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.