Over the past six months, Booking has been a great trade, beating the S&P 500 by 5.5%. Its stock price has climbed to $196.08, representing a healthy 17.3% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Following the strength, is BKNG a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.

Why Does BKNG Stock Spark Debate?

Formerly known as The Priceline Group, Booking Holdings (NASDAQ: BKNG) is the world’s largest online travel agency.

Two Things to Like:

1. Elite Gross Margin Powers Best-In-Class Business Model

A company’s gross profit margin has a significant impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors can determine the winner in a competitive market.

For online travel businesses like Booking, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer support, payment processing, fulfillment fees (paid to the airlines, hotels, or car rental companies), and data center expenses to keep the app or website online.

Booking’s gross margin is one of the highest in the consumer internet sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in product and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 87% gross margin over the last two years. That means Booking only paid its providers $12.99 for every $100 in revenue.

2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Booking has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the consumer internet sector, averaging an eye-popping 35.3% over the last two years.

One Reason to Be Careful:

Growth in Customer Spending Lags Peers

Average revenue per booking (ARPB) is a critical metric to track because it not only measures how much users book on its platform but also the commission that Booking can charge.

Booking’s ARPB growth has been mediocre over the last two years, averaging 4.1%. This isn’t great, but the increase in room nights booked is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Booking tries boosting ARPB by taking a more aggressive approach to monetization, it’s unclear whether bookings can continue growing at the current pace.

Final Judgment

Booking’s merits more than compensate for its flaws, and with its shares outperforming the market lately, the stock trades at 13.8× forward EV/EBITDA (or $196.08 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.

Stocks We Like Even More Than Booking

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