Priceline’s Big Bet On Mobile Is Starting To Pay Off

With an increasing number of people using mobile devices to go online, the mobile platform offers immense growth potential for travel services. To leverage this, leading online travel agency Priceline (NASDAQ:PCLN) has been focusing on developing new applications and upgrades to the mobile web. Owing to its increasing investment in building a strong mobile platform, Priceline owned Booking.com saw the total transaction value of mobile hotel bookings grow from $1 billion in 2011 to over $3 billion in 2012. ^[1]

Offering applications for Andoid, iOS and Windows 8 devices, the Booking.com mobile application has been downloaded over 20 million times in the last three years. ^[1] With an inventory of over 280,000 hotels and 18 million reviews in 178 countries, Booking.com has been the primary product behind Priceline’s success in the European market. The company recently launched its first offline advertising campaign to build the Booking.com brand in the U.S., aiming to close down its gap with Expedia (NASDAQ:EXPE) in the region. (Read: Priceline Plans To Pare Expedia’s Lead In U.S. Online Bookings)

We estimate hotel bookings to contribute over 86% to Priceline’s valuation. In addition to accounting for more than 85% of the company’s revenue, hotel bookings are also the most profitable (~20% revenue margins).

An expanding hotel market and a rapidly rising mobile user base are two key trends driving growth in the online travel market. We believe that an increasing global hotel footprint combined with rising booking volumes via the mobile platform will augur well for Priceline’s future growth.

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The favorable mobile trends gives Priceline the opportunity to offer new products to its customers. Last year, it launched “Express Deals” and a number of other services offering thousands of great deals on hotels for the mobile users. As evident from the robust increase in hotel bookings over Booking.com, the transactional business on Priceline’s mobile services is growing rapidly. We expect Priceline’s focus on continuous innovation to further fuel the growth momentum.

Despite drawbacks such as high investment levels and lower conversion rates, we believe that it is important for OTAs to keep up with innovation in the rapidly growing mobile space or else they face the risk of losing out a growing user base of online travel bookings via mobile devices.

Drawbacks – Huge Investment & Lower Conversion Rates For The Mobile Platform

While the mobile platform offers immense growth potential, it poses a number of challenges in terms of design and developments, which require significant investments. Additionally, the conversion rate (percentage of people browsing its website who actually make a booking) for mobile is much lower compared to PCs, which lowers the monetization benefits from the platform.

However, when it comes to last-minute bookings, the mobile platform seems to be a preferred choice among users. As per a report by Google, mobile searches for last minute hotel bookings increased by 411% between June 2011 and June 2012, whereas that for desktop searches declined by 79%.

In the latter part of 2012, Priceline expanded its “Tonight Only Deals,” a mobile application feature that offers lucrative discounts for hotel booking made for the same night, to over 150 destinations. Additionally, it has been working on its desktop functionality and user experience to optimize the same for browsing on mobile devices.

We believe that a continuously improving mobile platform will be an important factor behind Priceline’s future growth.

Our price estimate of $633 for Priceline is at a slight discount to the current market price.

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1. Booking.com Mobile Bookings Triple, Priceline Press Release, April 11, 2013 [↩] [↩]