With a price-to-earnings (or “P/E”) ratio of 23.4x Booking Holdings Inc. (NASDAQ:BKNG) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E’s lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.
Booking Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
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Does Growth Match The High P/E?
In order to justify its P/E ratio, Booking Holdings would need to produce impressive growth in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 137% last year. The latest three year period has also seen an excellent 348% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 13% per year, which is noticeably less attractive.
With this information, we can see why Booking Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Booking Holdings’ P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
We’ve established that Booking Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 3 warning signs for Booking Holdings that we have uncovered.
If these risks are making you reconsider your opinion on Booking Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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Find out whether Booking Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
