August 31, 2007
Dueling Fools: Ctrip.com Bear

By Chuck Saletta

I never understood the appeal of booking travel online. Maybe it's because I live near Cincinnati, where an estimated 102% (only a slight exaggeration) of the flights are controlled by Delta (NYSE: DAL). Generally, I'll go to Expedia (Nasdaq: EXPE), Orbitz (NYSE: OWW), or Travelocity and price out a few options, then book my chosen flights directly through Delta.com. I usually get the same or better price, save on agency fees, and often get a frequent-flier-mile bonus for using Delta's own site.

Someone's buying it

Still, there must be people willing to pay more than they need to for travel. After all, China's popular online travel agent, Ctrip.com (Nasdaq: CTRP), is both growing and profitable. Like many companies in China's red-hot stock market, though, its shares seem to be a bit ahead of its actual, delivered financial results. I'm not quite sure how a $2.74 billion market cap is fair value for a company that had a mere $125.75 million in sales and $37.53 million in profits over the past year.

So ... 21.8 times sales and 73 times earnings? Metrics like that make Google (Nasdaq: GOOG) seem downright cheap by comparison. Lest you forget, I'm the one who proclaimed that Google would be the worst stock for 2007. Back then, Google traded at a mere 15.3 times sales and 59.2 times earnings -- substantially cheaper (if you can call it that) than Ctrip is today. While Google has been far from the worst performer of 2007, its shares have risen only 12% since that proclamation was published, despite the search giant's still-torrid growth.

The lesson for Ctrip investors: Even among rapidly growing companies, valuation matters. The more stretched the valuation, the higher the expectations baked into the stock, and the tougher it is for even tremendous business success to push a stock higher. Heaven forbid that Ctrip actually stumble with such a distended valuation.

Cracks in the foundation

That said, there are already signs that Ctrip's growth may be slowing. The company recently issued guidance forecasting 35% revenue growth, lower than analysts were expecting. That sent the company's shares tumbling as much as 17% over the following 10 days. While its shares have since recovered much of that brutal pummeling, the rapid drop underscores the extra risks inherent in investing in a company that's priced for perfection.

Meanwhile, there's this little gem: Japan's Rakuten sold out its entire 13,290,000 American Depositary Shares of Ctrip, and had its representative on Ctrip's board step down. If Ctrip's future were really so bright, the abrupt severance of such as a strong relationship would seem particularly odd. Is Rakuten, already a big player in the Japanese travel market, considering competing directly against Ctrip in China? Is Ctrip gearing up to take on its former Japanese investor?

If such competition is coming, either in China or Japan, it brings a whole other layer of risk to owning Ctrip. Unlike Ctrip's money-losing Chinese competitor eLong (Nasdaq: LONG), Rakuten is a successful, profitable, well-entrenched enterprise. Such competition will likely pressure Ctrip's extremely hefty margins, even the company it does compete successfully. And if no such competition is imminent, Rakuten's actions become even more worrisome.

The total picture

With a distorted valuation, a business model that cost-conscious consumers can easily exploit, lowered estimates, and a large investor bailing out, there's little reason to still love Ctrip. The company's stock has certainly performed well for Motley Fool Hidden Gems subscribers since first being selected. Investors' future returns, though, are determined by what the company does in the future, not how well it has done in the past. At this point, there's simply far more risk than potential reward in Ctrip's shares.

Fool contributor Chuck Saletta is a Medallion member of Delta's SkyMiles program; he spends way too much time in airports. At the time of publication, he did not own shares of any company mentioned in this article. The Fool's disclosure policy kicks back in the VIP lounge.

(Source: Motley Fool)