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
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
So ... 21.8 times sales and 73 times earnings? Metrics like that make Google
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
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.