Booking Holdings Inc (NASDAQ:BKNG) reported earnings last night and Wall Street hated what they saw. The stock fell 8% on the headline even though they delivered a beat on the top and bottom lines. But these days, investors are on edge and are focusing most on forward guidance. BKNG came in light on that front so traders hit the sell button quickly.
Luckily for Booking bulls, the stock came into the earnings up 15% year-to-date, so even after this dip, the overall trend long-term is still intact. BKNG stock is a momentum stock. It runs really fast in either direction and it often doesn’t need a reason to do so. So on an earnings reports, it is not that surprising to see this size move.
The good news is that valuation on Booking stock is reasonable given the growth the company usually achieves. Yes, it carries a high ticket stock price but it doesn’t mean it’s expensive. The price-to-earnings ratio is under 50, and that’s in line with its industry.
Investors were disappointed with the light second-quarter guidance. But there is also concern around some costs increases. Management needs to commit to grow its inventory to maintain its lead over Airbnb. But this is part of normal operating procedures and I am sure that BKNG has seen such hurdles before and has consistently overcome them.
I expect nothing different going forward, and therein lies the opportunity.
Inside my bullish macroeconomic thesis, I want to create income from Booking stock without any immediate out-of-pocket expenses. Earlier this week we saw TripAdvisor, Inc. (NASDAQ:TRIP) report earnings, and its stock shot up tremendously in spite of it being the company that loses money. So this proves that is all about expectations. Investors had higher expectations of company guidance, and they are wrong to sell it.
Management is merely being cautious in an unstable headline trading environment with regards to tariffs and geopolitical unrest. It shows responsibility and maturity, so this team will overcome and conquer going forward.
Technically speaking, there are several levels of contention below current price that will be support for BKNG in the long run. Should the stock continue to fall against my risk, I will end up owning shares at a deep discount from current price. This worse-case scenario is totally acceptable to me given the intrinsic and tangible value that I see in Booking.com.
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BKNG Stock Trade Ideas
The Trade: Sell the BKNG Oct $1,560 naked put for $11. This is a bullish trade where I have a 90% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $1,549.
Selling naked puts carries big risk, especially for a momentum stock like BKNG. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the BKNG Oct $1,570/$1,560 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 12% if successful.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.