Should OpenTable Be Worried About Yelp and TripAdvisor?

OpenTable has had many years of dominance in the restaurant reservation space, but as other companies seek new growth opportunities, OpenTable's market-leading business might now be in jeopardy.

May 19, 2014 at 12:05PM

OpenTable (NASDAQ:OPEN) has the leading restaurant reservation technology in the U.S., and has essentially dominated the market since its inception. Despite consistent growth, however, OpenTable's stock has been volatile due to fears of competition as the industry itself has few barriers to entry. Now that Yelp (NYSE:YELP) and TripAdvisor (NASDAQ:TRIP) are prepared to make their entrance in the space, should OpenTable's investors be worried?

OpenTable's current market dominance
OpenTable's first quarter earnings report showed a continued trend of solid growth and market dominance. The company saw revenue grow 18.2% to $53.78 million, with reservation revenue growing at a faster 27% clip and accounting for nearly 65% of total sales.

Moreover, with North America accounting for 86% of the company's revenue, investors believe that international markets remain a great opportunity. In retrospect, North America's dominance really speaks to the presence of OpenTable's business, as it has over 7,700 installed restaurant bases in international markets and nearly 24,000 in North America.

TripAdvisor gaining an edge on OpenTable
With that said, OpenTable for the first time faces the threat of real competition in this space. Earlier this year, online travel site TripAdvisor acquired European restaurant reservation service LaFourchette for $140 million. Already, LaFourchette has a larger market presence than OpenTable in international markets, having 12,000 restaurant partners.

For TripAdvisor such a move makes sense. This is a company that's in the business of improving the quality of its customer's vacation, so what better way than making reservations for tourists simpler? For online travel companies, international markets are both competitive and important as a growth driver. This move gives TripAdvisor an edge.

Yelp adds reservations with reviews
While TripAdvisor's investment in the restaurant reservation space could affect OpenTable's international business long-term, the real threat involves Yelp. The review site recently acquired the company SeatMe, which operates a reservation platform for restaurants and nightlife venues.

This acquisition is especially important in getting users and businesses to better interact with Yelp. SeatMe will likely have success due to Yelp's one million plus restaurant and nightlife listings.

Adding fuel to the fire, OpenTable creates its revenue by charging a hardware fee to restaurants, along with subscription and booking fees. Yelp has already said that its service will be free to all restaurants that claim their Yelp page, which then makes the restaurant page more accessible and leads to updated menu items, prices, and better reviews. Essentially, Yelp is trying to improve its restaurant content and make the company a one-stop shop for dining and nightlife options.

How do these moves ultimately hurt OpenTable?
Offering more than 1 million businesses free reservation technology is sure to cut into OpenTable's 12,000 partners, and TripAdvisor's presence in Europe is also likely to hinder OpenTable's growth in that particular region.

However, the most significant problem for OpenTable is that it's no longer going to be used in making reservations on Yelp, which likely is a large piece of its business. Therefore, with these two moves on behalf of Yelp and TripAdvisor, OpenTable loses its pricing advantage, a large source of its business with Yelp, and its advantage in one of the key regions of growth in Europe.

Final thoughts
OpenTable currently trades at 67 times earnings, with operating margins of 23.5%. Due to the recent actions on behalf of Yelp and TripAdvisor, however, investors have to believe that OpenTable is too expensive and that it will have to cut service prices at some point in time. Therefore, while OpenTable will likely remain relevant, it'll unlikely stay dominant. If it loses its dominance, this will translate into a lower stock price.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends OpenTable, TripAdvisor, and Yelp. 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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