Is the Race to the Bottom Over for Ctrip.com International, Ltd. (ADR)?
Last quarter, Ctrip.com , a leading player in the Chinese travel space, made it clear that a race to the bottom was occurring in its industry. With the entrance ofQunar and ongoing competition from eLong , Ctrip CEO James Liang prepared investors for the worst:
"Looking ahead ... a year or two years, I think we'll face continued pressure as more players are putting more resource into this very promising high-growth market."
In essence, Ctrip had enjoyed first-mover status, similar to what Priceline.com experienced in America and Europe. But once other players saw how lucrative online travel reservations were becoming, they flooded the market with the lowest possible prices in order to gain market share.
Ctrip had no choice but to follow suit, attempting to gain more market share and hoping that its cash reserves would allow it to win out while other players ran out of cash to continue their price-slashing strategies.
With the company's announcement of earnings yesterday, it appears that there may be a light at the end of the tunnel, and investors are excited about that prospect, sending shares up as much as 22% today.
The important metricsFor long-term investors, the focus needs to be squarely on winning over market share right now. The company's three largest segments are in transportation (with the bulk being airline tickets), accommodations, and packaged tours.
Here's how those three performed during the fourth quarter:
While all of these results came in ahead of expectations, I highlighted the growth in transportation volume for good reason. Last quarter, the company forecast 55%-65% growth in this area -- so this was a huge surprise to the upside for investors.While airline ticket volume grew 40%, the bulk of the surprise came from an astounding 300% growth in volume of train tickets.
It's all about the mobile appLast quarter I talked about how Ctrip's mobile app was the most important part of the company. That's because Ctrip hopes to become a one-stop shop for all the travel needs of the average Chinese citizen. It hopes to have a ridiculously convenient platform that offers the ability to book hotels, airline tickets, bus tickets, train tickets, and even passport services.
At the end of September 2014, the company had reported 350 million downloads of its app. As of the end of 2014, that number had increased 71% to 600 million. This is very important. While not every person who downloads the app is going to use it, the ubiquity of the Ctrip app is a key differentiator for the company as it looks to gain critical market share.
During the fourth quarter, more than 70% of Ctrip's business was conducted via mobile devices, further demonstrating the importance of the company's focus on its app.
Impressive guidanceBut the biggest reason for the company's stock pop today is its impressive guidance. Management said that, during the first quarter of 2015, revenue growth is expected to accelerate to between 40% and 50%.
Breaking it down a bit more, management stated that accommodation volume is expected to grow by 50%-60%, and transportation volume is expected to grow by 80%-90%, with airline tickets bumping up 50% and train tickets nearly doubling.
With only two weeks left in the first quarter, investors can rest assured that the company is almost positive that it will hit these targets.
Furthermore, Jenny Wu, the company's chief strategy officer, had this nugget to share about the second quarter: "We would like to talk about the 2Q also ... Based on our current visibility, we expect our net revenue will grow about 40% to 50% year on year. And we push the team, we will try to return to be profitable on non-GAAP basis in 2Q."
All in all, this is very positive news for investors, as the race to the bottom in the industry may be drying up, and Ctrip's investments in mobile technology are really starting to pay off.
The article Is the Race to the Bottom Over for Ctrip.com International, Ltd. (ADR)? originally appeared on Fool.com.
Brian Stoffel owns shares of Ctrip.com International. The Motley Fool recommends Ctrip.com International and Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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