The house rules are simple in this weekly column:
- I bash a stock that I think is heading lower.
- I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, MakeMyTrip (Nasdaq: MMYT ) .
An unexpected voyage
India's leading online travel site has weathered a bumpy ride. MakeMyTrip was a star in its market debut last year -- the hottest IPO since 2007! However, the market has since awakened to the stock's stiff valuation relative to its near-term fundamentals.
The company's shares plunged nearly 27% after posting disappointing quarterly results back in November. Last night's quarterly release, while substantially better than its first public outing, still doesn't justify what shares of MakeMyTrip are currently worth.
Net revenue after service costs climbed 59% to $17.3 million in its fiscal third quarter. Adjusted net income soared 132%, but we're really only talking about $1.8 million -- or $0.05 a share. The good news is that revenue growth is accelerating, and that MakeMyTrip is actually profitable. Analysts were expecting less, so it's a relative victory. However, how are we looking on an absolute basis?
MakeMyTrip has just shy of 35 million shares outstanding after last summer's IPO, giving it a market cap of roughly $930 million. Doesn't this seem a bit steep for a company generating weak margins on paltry revenue levels?
I get the India story. The country is finally getting serious about beefing up connectivity. MakeMyTrip stands to benefit greatly as a niche leader. However, there are plenty of questions left unanswered.
- How long will it take for India's Internet penetration rate to dramatically ramp up results at MakeMyTrip?
- Will it still be the travel leader of choice by the time that happens?
- How sure are we that portals will even be necessary, given the global shift by airlines and hotel chains to reach out directly to travelers?
Investors can hardly cling to the hope that MakeMyTrip will become a juggernaut overnight. The company guides investors to expect $59 million to $61 million in revenue after service costs in fiscal 2011. After ringing up $44 million in revenue on that basis through the first nine months of the fiscal year, MakeMyTrip's guidance is calling for a sequential dip in net revenue during the current quarter.
I blasted MakeMyTrip's inflated share price in this column five months ago -- and I was right. Before today, the stock had shed more than 20% of its value since I made that call. Shares of Rediff.com (Nasdaq: REDF ) have also fallen by more than 20% since I singled out the second-tier online portal three weeks ago.
Someone's bound to bash me for coming down on Indian Internet stocks, but both calls have been accurate. These stocks' share prices promise what their fundamentals can't deliver.
I have no problem believing that MakeMyTrip will eventually grow into its nearly $1 billion valuation. Unfortunately, it will probably take a couple of years to get there. In the meantime, your money can be appreciating elsewhere, instead of tied up here.
Still, as I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
Ctrip.com (Nasdaq: CTRP )
Boosters tout MakeMyTrip as the Ctrip of India. Unfortunately, MakeMyTrip trades at a higher price-to-revenue multiple and a dramatically higher price-to-earnings multiple. Before you argue that Ctrip is mature, keep in mind that analysts are targeting 48% revenue growth at Ctrip in 2010. The company reports fourth-quarter results next week.
The valuation disparity grows even wider when you pit MakeMyTrip against smaller players including eLong (Nasdaq: LONG ) and Universal Travel (NYSE: UTA ) , which trade at much lower valuation multiples. Why am I comparing MakeMyTrip to Asian travel upstarts? Well, MakeMyTrip bought a majority stake in a small Singapore travel agency this week. I don't know about you, but I'm not sure I like a company that investors see as a ground-floor opportunity losing focus by buying a traditional travel agency in another country.
HDFC Bank (NYSE: HDB )
Instead of banking on cyberspace plays that may take years to play out in India, why not cash in on a banking sector that's already riding the improving economy? HDFC is one of India's largest banks, and the country's third-largest lender. It also posted better-than-expected quarterly results last month. India's decision to raise interest rates to curb inflation may not be welcome news for banking margins, but the favorable asset quality implications behind a booming economy also mean that HDFC's borrowers are less likely to default.
priceline.com (Nasdaq: PCLN )
There's something to be said for a dot-com darling that has beaten Wall Street profit estimates in each of the past 18 quarters. The "name your own price" travel portal won't be reporting its quarterly results until later this month, but its most recent quarter was another beauty. Revenue and adjusted earnings soared 37% and 57%, respectively. Before you argue that MakeMyTrip is growing more quickly, keep in mind that if MakeMyTrip were valued at priceline's price-to-sales ratio, it would trade for less than its $14 IPO price. Besides, priceline's a winner.
I'm sorry, MakeMyTrip. I guess I'll see you next fall.
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