When is a 92 percent profit increase reason for pessimism? The answer to that question would normally be “never,” but we’re seeing a rare case where a near doubling in profit for leading online travel agent Ctrip (CTRP) has sparked a sell-off in the company’s shares. Ctrip isn’t alone in the bearish trend, with rival Qunar (QUNR) also moving steadily downward in the last 2 days after a spectacular IPO last week. If I were an investor, I wouldn’t worry too much about this sell-off, which looks largely technical. But both stocks could be set for a few months of slow or no growth, following their recent spectacular run-ups.
Before we begin with this look at Ctrip’s latest quarterly results and Qunar’s post-IPO performance, let’s first look at what’s been happening to their stock. Qunar shares made their trading debut last Friday, after the company twice raised its IPO price due to strong demand and finally sold its American Depositary Share (ADS) at $15 apiece. The shares more than doubled and traded as high as $34.99 on their first day, and finally closed up 89 percent at $28.40. In the first 2 days of this week, however, the shares have moved steadily downward and last closed at $26.50, still about 77 percent ahead of their IPO price.
Meantime, Ctrip’s shares have rocketed this year and now trade near an all-time high, tripling over the last 52 weeks alone. The company went through a rough patch last year, as it fought a tough price war with Qunar that heavily eroded its profits. But that war has eased significantly this year, helping Ctrip to return to strong profit growth. Yet despite the solid numbers in its latest earnings report, Ctrip shares were down sharply in after-hours trade after the results came out, dipping 7.8 percent.
Let’s take a closer look at Ctrip’s results, which show the company’s net profit nearly doubled to $61 million for the 3 months to September (results announcement). Revenue grew at a slower but still respectable 31 percent to $252 million. Reflecting the easing competition, Ctrip said its third-quarter operating margin rose to 19 percent, from 16 percent a year earlier at the height of the price wars.
So, what exactly spooked Ctrip investors into selling their shares? Perhaps part of the reason was the company’s forecast for revenue growth to slow to 20-25 percent in the current quarter. As I’ve said above, I also do think a big part of the sell-off may be coming from investors looking to pocket some of their gains after the spectacular rise in Ctrip shares this year. It could take a few months for the company’s shares to regain some of their previous momentum; but I’ve previously said that I like Ctrip for its ability to focus and innovate in its core area, and am fairly confident its shares will start to rise again as investors continue to buy into its growth story.
In the meantime, I’ll also be watching closely to see what both Ctrip and Qunar do with their big piles of recently raised cash. Qunar ultimately raised $167 million from its IPO, while Ctrip also raised $800 million last month through a major bond offering (previous post). I previously predicted that Ctrip could use some of the cash to invest in Qunar’s IPO, but clearly that didn’t happen. I could still imagine an equity tie-up between the pair, though perhaps the more likely scenario is that Ctrip will use some of its more than $1 billion in cash to buy an outside company in the fast-growing mobile sector. Such a move would be consistent with Ctrip’s previous strategy, and could quickly help to restore investor enthusiasm towards the company.
Bottom line: Ctrip and Qunar shares are likely to stagnate or even correct a bit after their recent run-ups, but Ctrip could get a boost if it makes a major acquisition in the mobile travel sector.