Booking.com’s stellar run: Why investors should keep their reservation

Booking.com is a best-in-class share, having earned an average of 16% annualised dollar returns over the past 25 years. Despite its market dominance, Allan Gray portfolio manager Thalia Petousis argues that it’s still a compelling share to invest in.

The amalgamation of three internet start-ups in the 1990s, Booking.com’s meteoric rise to success has taken the travel industry by storm.

“The idea that customers could ‘name their own price’ when booking a holiday stay was quite revolutionary,” asserts Petousis. “Another innovation was incorporating small independent hotels into their offering, something that hadn’t been done before.”

Secrets to its success
The business has been built on the key principle of always giving your customer flexibility – from transacting in their own language and currency to filtering how much they’re willing to spend.

“Perhaps most importantly, Booking.com saw the future in allowing each customer to carefully curate their own holiday by offering them any accommodation type they desire – from hotels to apartments and campsites or even a glass-and-ice igloo in Finland,” she says. “As package holiday giants declined in popularity, it resolved to always give the customer as much choice as possible.”

Proof of its success lies in the fact that its gross bookings and profit margins far outstrip its rivals. “In 2024, Booking.com handled a gross bookings value of US$166 billion,” states Petousis. “It charged an average revenue commission of 14%, on which it earned a net profit margin of 24%, almost three times wider than the net profit margin of its main competitor, Expedia.”

Why this share has the hearts of investors
Investors have been drawn to this share because its attractive returns over time, as well as the healthy dividends it pays shareholders. “From 2014 to 2024, Booking.com made US$148 billion of revenue and US$43bn of operating profit,” Petousis explains. “This translated into 100% free cash flow conversion and the company returned this full US$43 billion amount to shareholders via share buybacks and dividends.”

In addition, Booking.com’s accounting practices are refreshingly conservative, it has a pristine balance sheet and it runs a structural net cash position. “The company has actually become more efficient at marketing spend over time, in part by leveraging AI algorithms to target customers better,” Petousis maintains. “It spent only 3.8% per gross booking on customer acquisition in 2024, compared to 5.1% in 2016.”

Leveraging opportunities
Some analysts contend that because of Booking.com’s dominant market position and the threat of AI disruption, the share is now mature with few remaining growth prospects. But Petousis believes that this misses the mark entirely.

“For one thing, the company will continue to benefit from travel market leverage,” she comments. “When people achieve larger incomes, they spend incrementally more of that additional income on travel.”

Another opportunity is incremental revenue growth. “Future revenue growth could be underpinned by the ongoing shift from offline to online travel as the younger population replaces older tourists,” she says. “Booking.com has also been taking a larger share of the alternative accommodation, US and Asia-Pacific markets, where it is far from dominant.”

Seamless travel experiences
Similarly, the advent of AI could help the business realise its long-held vision of the Connected Trip. “The idea is for Booking.com to provide a friction-free, personalised end-to-end experience, capturing a larger share of travel wallets through the cross-selling of flights, tours dining and travel experiences,” she says. “Because Booking.com already knows from its bookings when a customer will be in a specific location, it can easily market a tour or activity that seamlessly fits into their itinerary and AI will only make this more targeted and effective.”

By making its advertising spend even more efficient and lowering its fixed costs through AI chatbots, Booking.com looks set to continue to grow.

“Booking.com's battle cry is to offer travellers freedom of choice and the ability to travel within their stated budget. With its Connected Trip vision, Booking.com is fighting off complacency by keeping its eye on a bigger prize,” concludes Petousis.