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April 26, 2006

Safa is Ctripping, not roundtripping

Tim Mullaney

Closely watched Piper Jaffray Net analyst Safa Rashtchy is out to avoid making another roundtrip -- way up, then way down -- on a hot stock.

Rashtchy made his name early in the decade by tabbing two hot stocks way before everyone else: Overture Services, which was the innovator and first mover in pay-per-click search advertising, and online DVD-by-mail service Netflix. In each case, if you listened to him you more or less 5x-ed your money in a not very long period. And in Overture's case, you did it in the teeth of the 2001 tech bust, in a stock even Henry Blodget rated neutral. But...and it's a big but...In each case Rashtchy stayed bullish too long. Overture went from the high single digits to the 40s and back to $10.90, with Rashtchy still bullish for most of the ride, before Yahoo bought Overture for about $24 a share. (Overture's problem, in a word, was Google). Netflix went from a $7.50 a share IPO in 2002 to above $40 by 2004. Then Blockbuster entered its market, and Netflix went under $10. It's since recovered to $32, since Blockbuster is not exactly Google. Again, Rashtchy eventually turned bearish, but rode the stock for a good chunk of the way down before catching most of the recovery with a buy rating.

All of this background makes Rashtchy's bearish call this morning on Chinese Web travel agency Ctrip International more notable than it would be coming from nearly anyone on the street.

Rashtchy has been a Ctrip bull basically since it came public in December 2003. He's ridden it from around $10 a share to $47. (Similarly, BusinessWeek put Ctrip in the BW Web 20 model portfolio of profitable Net companies in March 2004, when it commanded $14.50 a share). And Ctrp helped spark Rashtchy's interest in the China Web sector as a whole, which he's made something of a specialty. But the shares have been on a rocket ride lately,up 32% just since the Web 20 was last updated Feb. 21.

Rashtchy's headline: "Time To Take Some Profits; Valuation Has Priced In All Upsides And Then Some." The argument is simple: Ctrip is still a secular growth story that rides the rising affluence of Chinese masses, and the penetration of the Internet in China. But it trades at 30 times this year's earnings before interest, taxes, depreciation and amortization while other Chinese Net stocks command only 18 times. Rashtchy says the market is so used to positive earnings surprises from Ctrip that investors have built the surprises into the stock. If Ctrip beats estimates, then, the stock is still too expensive. So Rashtchy lowered his rating to Market Perform from buy. And, I could add, if it doesn't beat forecasts...

As I said, the skepticism now is especially notable considering that Rashtchy adores the Chinese Internet sector -- and considering that, if anything, his temperamental inclination and his history is to ride his winners. After all, no one wants investors to take another roundtrip on Ctrip.

12:47 PM

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