OpenTable (OPEN) Shows Growth but Not Stock Price

OpenTable (OPEN) is a company that allows users reservations at restaurants across the United States and select international cities. It is an exciting company that currently trades on the NASDAQ trading at about $35 a share. Trefis though values the company much higher at a stock price of $68.15 a share. This is intriguing and is worth looking into. I am curious as to how this company makes its money and what success it has for the future.

OpenTable“OpenTable brings in about 60 percent of his restaurant’s reservations. Those bookings come at a price. Gilbert paid $2,351 on his last monthly OpenTable bill.” Bloomberg on anxiety over OpenTable.

OpenTable has a simple business model, created in 1998 catering to members of the San Fransisco restaurant and dining scene. Since then it has exploded and caters to an international clientele. Users simply search the website for either their favorite restaurant or a specific state and/or city. Next, I found my favorite restaurants in my home town and selected dinner for two tonight at 7 PM. It give me a nice selection of options and if I did not know better a price range to expect for the menu. By clicking a time I could reserve dinner for tonight in real time. That’s it! Done! Easy!

The business model for Open Table is impressive. It does not cost anything to its users, me and you, and curtails annoying phone calls for reservations, especially if you don’t have the time. They have an Open Table App available as well to add to your cell phone to make it that much easier. How does it make its money then?

Open Table receives its income in one of a few ways as illustrated below:

The number of subscribing restaurants is impressive as it looks to add exponentially in 2012. Similarly the number of active diners making reservations is increasingly steadily. Similarly cash holdings are at $80 million with a healthy income of almost $20 million on $133 million in sales. Perhaps costs are getting higher with international exposure.

OpenTable has a lot of promising stats to argue investing in it. However what are its short comings?

  1. For one a simple look at the P/E at 46 and a forward P/E of 25 make it seem quite expensive. Keep in mind that the stock is now cheap hovering around $38 as it was trading at $120 during April and May of last year. That is quite a drop and to still be that expensive of a stock is disheartening for investors. Looking at the chart is a messand sad to see if you invested early!
  2. Another element to consider is barriers to competition. OpenTable has recently discarded its coupon and discount program similar to the Groupon model to focus specifically on the reservation side of the equation. But what protection does Open Table have as UrbanSpoon and Zagat, recently purchased by Google are stealing away market share? This has yet to be decided as Open Table must diversify and begin to provide a unique element that no one else will. Thus it appears the stock has no barriers to competition so often seen in internet based companies.
  3. Analysts are even concerned about OpenTable’s ability as far as management is concerned. Certain analysts such as myself have been concerned about the bookkeeping which for a business like this easily allows the company to exaggerate earnings per share. Similarly there is criticism of a recent buyback by Open Table of $50 million dollars in stock. This is ridiculous for a growth stock! It is also utterly useless for a company who’s IPO was not too distant a memory. They will need that money and I am afraid the stock buy back is going to hurt them in the long term.

Many analysts are putting the OpenTable stock (OPEN) at a short position now and I cannot blame them. There are a lot of problems with OpenTable for as many good things. Just because the stock has excellent cash flow, is profitable and provides a simple and useful model for consumers does not make it a successful company or stock investment.

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