Shares of OpenTable (Nasdaq: OPEN ) are being sent back to the kitchen this morning.
The online restaurant reservations leader served up a first-quarter report that is being received poorly by investors who are emphasizing the top-line weakness instead of welcome margin expansion and concept popularity.
Revenue climbed 17% to $39.4 million, just short of the $39.6 million that analysts were expecting. OpenTable's top-line outlook for all of 2012 now stands at $158 million to $164 million, well shy of the $168.2 million that the pros were targeting.
That certainly doesn't look pretty, but let's get to the metrics where OpenTable is smiling kindly. Adjusted earnings soared 36% to $0.40 a share, blowing past the $0.34 a share that analysts had been projecting.
The disconnect may be as simple as OpenTable's decision several months ago to abandon the "daily deals" model that hasn't been a very profitable model for even market leader Groupon (Nasdaq: GRPN ) . Investors cheered two years ago when OpenTable dusted off its Groupon-like Spotlight offering, but now that investors have turned their backs on Groupon and the crummy margins being reported in the flash-sale space, why isn't OpenTable being applauded? Sure, it's giving up the incremental revenue in offering prepaid discount vouchers, but have you seen the bottom line?
OpenTable's outlook for all of 2012 calls for an adjusted profit of $1.49 a share to $1.64 a share, and the midpoint there is comfortably ahead of the market's target of $1.53 a share.
It's not just the sidestepping of the fading daily deals craze that's hurting OpenTable on the top line. The number of restaurants on the OpenTable platform has expanded by 22% to 25,844, and the company's online reservations system seated 30 million diners during the first three months of the year. That's up a hearty 34%. However, revenue -- up 17% -- is growing just half as quickly as the number of diners that OpenTable is seating.
Is that alarming? It shouldn't be. Restaurants complaining about how expensive implementing OpenTable can be are now paying less per reservation. This will make OpenTable less vulnerable to the competition, led by IAC's (Nasdaq: IACI ) Urbanspoon and its Rezbook platform and any other potential entrants.
OpenTable is doing the right thing, even if the market doesn't see it that way.
Two months ago, Benchmark Co. analyst James Dobson raised the possibility of OpenTable as a buyout candidate. Now that the stock is even cheaper -- and the market is favoring the profitless though faster-growing Yelp (Nasdaq: YELP ) as a Web-based foodie play -- expect that chatter to return.
The market misunderstands the spread that OpenTable is dishing out, and somebody's bound to step up and pick up the check.
Shares of OpenTable are still trading higher than when I recommended the stock to Rule Breakers newsletter subscribers three years ago, but now it's time to discover the next rule-breaking multibagger. It's a free report. Want it? Get it.