Shares of Booking Holdings (BKNG) are slipping after both Jefferies analyst Brent Thill and Morgan Stanley analyst Brian Nowak downgraded the stock to Neutral-equivalent ratings, citing growth concerns. Thill added that he is turning “incrementally more cautious” on the travel space given the highly discretionary nature of travel spend and market expectations for a macro slowdown.
MACRO SLOWDOWN: In a research note on Wednesday, Jefferies’ Thill downgraded Booking to Hold from Buy and lowered his price target on the shares to $1,940 from $2,400. The analyst told investors that he is turning “incrementally more cautious” on the travel space given the highly discretionary nature of travel spend and market expectations for a macro slowdown. Thill noted that he expects business travel to get impacted too as businesses reign in non-essential costs. Desktop traffic trends from the fourth quarter are somewhat mixed and directionally a cause for concern, the analyst added. Further, Thill argued that competition in the travel space remains intense and a deteriorating macro backdrop could also lead to “irrational advertising spend” by certain players, potentially pushing all participants to unsustainable expense levels. While he continues to like Booking's fundamentals, Thill sees limited upside in the stock over the next 12 months.
SLOWING GROWTH, INCREASED INVESTMENT: Morgan Stanley’s Nowak also downgraded Booking to Equal Weight from Overweight as he sees slowing room night growth, higher spend on new initiatives and execution uncertainty in the maturing online travel industry pressuring profits and multiples. Online hotel penetration is approaching 50% in the U.S. and Europe, Nowak noted, adding that he believes online travel agencies will invest to drive more direct, repeat users as they aim for eventual faster long-term growth. While these investments are likely the correct long-term strategies for growth, Nowak also sees higher execution risk, longer payback periods and more near-term margin pressure. Nonetheless, the analyst acknowledged that he remains “keenly focused on traction from these new investment initiatives” and evidence that they are driving material incremental gross profit growth, which could lead to profit re-acceleration and ultimately make him “positive again.” Nowak lowered his price target on Booking’s shares to $2,050 from $2,100. Citing similar concerns, the analyst also downgraded Expedia (EXPE) to Equal Weight from Overweight and cut his price target on the stock to $125 from $150.
PRICE ACTION: In morning trading, shares of Booking have dropped about 3% to $1,640.57, while Expedia’s stock has slipped over 3% to $113.30.