The kitchen's heating up at OpenTable (Nasdaq: OPEN ) .
Shares of the online restaurant reservations leader rose 3% yesterday after Benchmark Co. analyst James Dobson raised the possibility of OpenTable as a buyout candidate.
In upgrading the stock from hold to buy, Dobson argues that fears of competition are overblown. Churn is holding steady at a monthly rate of 1%, and most of that is coming from eateries that are closing up shop.
OpenTable has 44% of the addressable restaurants in North America on its platform, and no one is even close. Its nearest rival -- IAC's (Nasdaq: IACI ) Urbanspoon -- is sending an average of 25 diners a month to each of its 1,200 restaurants. OpenTable, on the other hand, is seating a monthly average of 479 patrons at each of its more than 17,000 North American restaurants.
However, Dobson's meatiest proposition is that OpenTable has now gotten to the point where it's an attractive acquisition target for consumer-facing Internet companies. He offers up Google (Nasdaq: GOOG ) and Microsoft (Nasdaq: MSFT ) as potential suitors.
Let's start with Google. It is -- after all -- a proven foodie when it comes to dot-com properties. It tried to snap up Yelp (Nasdaq: YELP ) before it went public earlier this month, settling for the cheaper acquisition of Zagat last year. Google may not be interested in dabbling in the electronic reservation book business, though it would be a brilliant way to get Android tablets into business establishments. It also loves to munch on data, and could probably do more with the information that OpenTable collects to personalize the experience for both diner and restaurateur than what the company is presently doing. Odds of a Google purchase of OpenTable? I'd give it 5-to-1.
Microsoft makes less sense, though it would love to get 25,119 restaurants worldwide to embrace a Windows-fueled enterprise platform. Just as Google is beefing up its street maps with listings, Microsoft's success with Bing relies on its street maps and travel searches. Odds? I'd give it 15-to-1.
What about Yelp? OpenTable and Yelp are strong partners. Customers posting reviews on Yelp can book reservations through OpenTable right there. The move would also help push Yelp toward profitability. OpenTable isn't cheap. It trades at 40 times this year's projected profitability, though heady growth takes that multiple all the way down to 16 if you look out three years. However, that's still better than Yelp, which is probably at least two years away from turning a profit. The rub here is that investors bidding up Yelp for its growth may see the slower OpenTable -- where revenue climbed 21% in its latest quarter -- as a sandbag. Odds here would be 25-to-1.
Finally, we have IAC. Urbanspoon is tiny, but Barry Diller's collection of online companies is not. We're talking about search portal Ask.com, local guides specialist CitySearch, and dating websites Match.com and Chemistry. Go through those names again. OpenTable would be a great fit across all of those properties. The only catch here is that IAC has been stingy in its acquisitions, preferring to buy smaller companies than OpenTable. Odds of a buyout -- even though it rivals Google in terms of being the best fit -- are closer to 50-to-1.
Table for one
Things won't be so bad if OpenTable remains a solo act.
Cynics who have been arguing that OpenTable's moat is weak and the barriers to entry are low in this niche have been proven wrong. Why is Urbanspoon's platform such a vacuum of engagement? Why has Google stayed away? Where are all of the enterprise software specialists and consumer-facing dot-coms that were supposed to eat OpenTable's lunch?
OpenTable's for real. If you don't believe me, let's talk about it over dinner. I'll make the reservations until you surrender yours.
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