• Ctrip beat analyst consensus on both top and bottom line, reporting an EPS of $0.36 on a revenue of $368 million
• Ctrip’s top line growth was driven by high volume growth in accommodation and travel segment but resulted in significantly lower margins.
• Ctrip’s stock was down in after-hours trading on guidance which included Q4 net loss and slower than expected top line growth.

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Ctrip (CTRP)  reported its Q3 2014 earnings after the market close on 25th November 2014. The company did manage to beat analysts’ estimates and its own guidance on both top and bottom line for the fifth quarter continuously. However, the stock was down 5.9% in after-hours trading due to weak Q4 2014 guidance.

Revenue Growth

Ctrip posted a strong revenue growth of 38% year on year beating analysts’ estimate of 33% and its own guidance of 30%-35%. Ctrip revenue rose from $268 million in Q3 2013 to $368.11 million in Q3 2014. Mobile platform developed by Ctrip also boosted its revenues. According to Ctrip total downloads of its mobile application rose 75% from last Quarter to 375 million.  Segment wise break up of revenue is given in the following chart.

Ctrip’s Margins Have Declined

There was all round decline in Ctrip’s margins. Gross margin declined from 75% in Q3 2013 to 72% in Q3 2014. Operating margins declined from 19% to 4% in same period last year. Non-GAAP operating margin declined from 27% Q3 last year to 11% in Q3 this year. Decline in margins were mainly due to increase in product development and sales and marketing expenditure. Product development expenditure increased by 83% to $100 million. Sales and marketing expenses increased by 69% to $97 million. Growth in expenses were due to one-time expense of share based compensation and continued focus on revenue growth. Ctrip is facing serious competition from Alipay and other OTA’s in China.

Continued Focus on Revenue Growth

Ctrip continues to focus on revenue growth as it sees lot of potential for growth in Chinese market. Ctrip’s belief is that it can make money after it captures a large share of the market. China’s economic growth gives Ctrip a huge growth potential. China is scheduled to become largest market for business travel by 2016. There is also going to be increase in outbound tourists from China. According to US Department of Commerce, tourists from China will increase by 172% between 2013 and 2019. Ctrip’s partnership with Priceline will enable it to capture a large chunk of this growth.

Weak Q4 Forecast

Ctrip’s stock price was down in after-hours in spite of an earnings beat because of its weak forecast for the next quarter. Ctrip has forecasted a revenue growth of 30% for the next quarter. This is lower than 38% revenue growth achieved by the company in preceding two quarters and analysts’ consensus of 32.5%. Ctrip has also forecasted a net loss in the next quarter. Chief Strategy Officer Jenny Wu forecasted non-GAAP operating margin to be negative 15%, a decline of 35% on YoY basis.

Conclusion

Ctrip’s valuation remains a concern. The company trades at a high PE ratio of 62 compared to Industry PE of 56. Its PE ratio is also higher than that of Priceline and Expedia. Slow-down in revenue growth as forecasted by the company coupled with declining margins will increase the pressure on Ctrip stock price. Ctrip might find it challenging to continue its fast growth while maintaining its margins due to extreme competition in the Chinese travel market. Ctrip does not make it to Amigobulls top stock list, Here is the list of top internet stocks .