Why I'm Short Ctrip

by: Danny Furman

I recently wrote a brief explanation of why I believe Ctrip.com (NASDAQ:CTRP) is significantly overpriced, citing most importantly the herd mentality of investors from the United States and Europe who had pushed the company's market cap to over $5B, 20X sales and 55X earnings. This enormous herd obviously saw parallels between CTRP and Priceline.com (NASDAQ:PCLN), which dominates the market it created for discounted travel in the US.

CTRP does provide the same services as PCLN, however it is an entirely different business. China's travel industry is a baby and consumers make purchases at Ctrip.com because it's the only way they know how. American consumers accept Priceline.com as the cheapest way to travel, which it often is, and happily purchase there what they remember paying much more for in the past. Basically, CTRP is a retailer in a new industry and PCLN is a discounter in an established one.

Contrary to what investors seem to expect, CTRP faces broad and significant competition. Chinese airlines even sell tickets directly through discounted online services, as China Eastern Air (NYSE:CEA) does through Taobao.com (OTC:ALBCF). Publicly traded CTRP competitors Sohu.com (NASDAQ:SOHU), Shanda (NASDAQ:SNDA), eLong (NASDAQ:LONG), Baoshinn (BHNN.OB), UTA and TravelSky (TSYHF.PK) are all growing (mostly faster than CTRP) and profitable. SOHU and SNDA both operate leading Chinese search engines and recently announced plans to spin off their travel businesses, so I'm not familiar with their market share or operations specifically in this sector. Ultimately, China's travel market is a new one, almost exclusively on line, extremely competitive and likely to see decreased margins as it saturates.

While many stocks have lost some ground in the last week, CTRP is now over 15% off its January peak, largely thanks to a 6% Thursday sell-off immediately following a 2-for-1 split. Some analysts called the split a bullish event and Piper Jaffray upped their target price to $81 (pre-split) a week ago, but this is a case in which the contrarian in me has too much ammo to listen to the cheerleading at all.

Having graduated from La Jolla High School in 2001, I first heard about stock splits as my first economics teacher, family friends and the like explained how investing $5K in local Qualcomm (NASDAQ:QCOM) or another internet company made them fit for retirement (before the bubble burst). Similarly, CTRP has had two magnificent runs, trippling from 2006 to 2007 and again in 2009, earning the stock a "Qualcomm in Y2K-esque" valuation. All else aside, the recent appreciation in CTRP paired with a 2-for-1 split appears bullish for the stock and has likely convinced many to open new long positions. Still, it is the only individual stock in which I hold a short position.

My explanation for the CTRP split is simple. The intent is to attract less educated investors to the table and for institutional investors to dump their 10 figure stakes on the public bit by bit before gravity takes hold of the stock. PCLN shares trade for $200+, so a $75 price tag on shares of CTRP was doubtfully affecting institutional or experienced investor sentiment in the slightest.

Making CTRP trade in the $30s puts it on a lot of people's radars and here's why: Newbies think a lower share price means more upside and there are always newbies cluelessly buying China. Inexperienced investors will convince themselves (as I would have a year ago) that CTRP has upside potential similar to other Chinese stocks in the $20-$40/share price range, despite a market cap of 10 times or more and a valuation that implies growth consistent with years the company had much less competition and higher margins.

Additionally, the increased Piper Jaffray target price for CTRP was less than 10% above the market price at the time, indicating that analysts there are "bluffing with a weak hand" and afraid to provide a target that sounds unrealistic. Insiders have sold multi-million dollar stakes in recent months and institutions have done about twice as much selling as buying in the last month, suggesting the stock has run farther than many knowledgeable folks see as reasonable.

I am not necessarily suggesting shorting CTRP at Friday's price ($32.65), although I believe the stock is still overvalued by 20% or more. If, however, anyone is thinking about buying CTRP, consider yourself warned.

Disclosure: Short CTRP

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