Booking Holdings' Shift To A Merchant Model Leads To Upgrade - Booking Holdings (NASDAQ:BKNG)

Booking Holdings Inc BKNG shift to a merchant model may be offering a favorable entry point, according to a new analyst note.

The Analyst

Wells Fargo analyst Robert Coolbrith upgraded Booking Holdings to Outperform and raised his price target from $2,000 to $2,150.

The Thesis

Earlier in November, Booking Holdings reported third-quarter earnings that fell short of analysts estimates, but several factors have Coolbrith encouraged about the stock moving forward.

Management’s articulation of 2019 guidance and long-term strategy that include platform investment, above-market top-line growth and tolerance of modest EBITDA margin deliverage led the analyst to be be constructive on the stock.

“With a muted post-print stock reaction - while BKNG shares initially reacted positively, shares are down 1% since the print, vs. the S&P 500 flat over the same timeframe - we note that shares remain significantly below historical valuation averages,” said Coolbrith.

In the third quarter, Bookings Holdings said its merchant hotel revenue jumped 53.4 percent but agency revenue grew less than 1 percent. The merchant hotel revenue growth coincides with the rollout of a new global payments platform that enables consumers and hotels to pay and make payments through more diverse systems, including Alibaba Group Holding Ltd BABA's Alipay and GrabPay.

The shift to the merchant model means the company only remits cash to the hotel at the time of the stay, allowing the company to hold onto cash for several mostly, mostly for free, said Seth Borko, senior research analyst for Skift Research.

Coolbrith said the shift to a merchant model is a potentially underappreciated tailwind for working capital dynamics and FCF growth moving forward.

Price Action

Shares are trading down around the $1,846 level.