OpenTable Is Down 27%! Should You Buy?

OpenTable (UNKNOWN: OPEN.DL  ) is a restaurant reservation and table management service. Its business model is considered to be the restaurant equivalent of Groupon (NASDAQ: GRPN  ) with its daily deals business. OpenTable positions itself as a useful middleman between consumers and the highly fragmented restaurant reservation business. The company, however, distinguishes itself for having been in business longer than many of its upcoming rivals and, boasts a network of 30,000 restaurants in the U.S., and more abroad . Shares of both OpenTable and Groupon have tanked in spectacular fashion this year.

The recent announcement by Yelp (NYSE: YELP  ) , the leading business review site, that it will start offering restaurants the ability to take bookings free of charge has not helped OpenTable's shares at all; they tucked in a further 7% drop.  Yelp made its announcement barley a week after TripAdvisor (NASDAQ: TRIP  ) said that it had bought out Paris-based Lafourchette, an online and mobile hotel-booking website.

Facing hard reality
On the face of it, the positioning of OpenTable as a middleman looks like a great business opportunity with ample room for growth. After all, companies like the Priceline Group (NASDAQ: PCLN  ) have grown so successful by positioning themselves as middlemen between travelers and the highly fragmented hotel reservation industry. OpenTable has gained a strong market share and charges restaurants roughly $1 per diner, plus some other system fees. All fees are paid by the restaurants, and diners get the service for free.

OpenTable has been largely profitable for the most part, and only recently suffered a $3.6 million operating loss during the just-ended quarter after taking a $12.6 million impairment charge. The company had recorded a $7.1 million operating profit in the first-quarter of 2013.

Sluggish business
Alas, it turns out that the business of restaurant booking for diners is not anywhere nearly as lucrative as you would be tempted to think. OpenTable went into business in 1998, but only went public in 2009.  One could argue that it delayed for so long because it did not see the need for additional capital to expand due to the sluggish nature of its business.

OpenTable released a statement a few days ago saying that it has seated 40 million diners in its international business since inception.

Looking at the company's latest 10-K, OpenTable managed to bring in 6,050 diners to each of its listed American restaurants on average, but just 1,806 per restaurant for its international markets.OpenTable finished fiscal 2013 with a revenue of $190 million.

OpenTable's profit margin clocks in at a modest 11.4%. Another piece of bad news is that OpenTable's top line grew 18% in the last quarter, but the company warned that this might slow down as the quarters roll on.

It therefore appears as if the growth prospects of this business are not that great. Perhaps the company's biggest failing has been its inability to break into international markets. If only the company could work out a formula to get more revenue from international markets, then its top line could expand considerably.

Expensive shares
OpenTable shares trade at around 7.6 times 2013 sales. For a company that says it's top-line will now expand at sub-20% levels going forward, that's too expensive.

Yelp's shares also look ridiculously priced. The company is still growing at a blistering pace, however--66% top-line growth in the most recent quarter. Yelp's biggest problem right now is how to turn a profit. The company has remained in the red for 10 straight years, primarily due to the following reasons:

  • Rapidly swelling marketing expenses as a percentage of sales. For instance, Yelp's marketing expenses grew at 16% in the last quarter compared to the previous quarter, while its revenue grew just 8% over a similar period.
  • Yelp rewards it management too generously through stock-based compensation. This keeps diluting its shares each quarter. Yelp's outstanding shares increased 3.35% between the fourth-quarter of fiscal 2013 and the first-quarter of fiscal 2014.

In a toss-up between Yelp and OpenTable shares, however, I would go with Yelp. The company seems to have much longer growth runways ahead of it than OpenTable does.

Meanwhile, Groupon is rapidly morphing into an Amazon, even as its daily deals business continues to struggle. The company's Groupon Goods accounted for 72% of its fiscal 2013 revenue of $2.6 billion. The segment is also growing much faster than the company's overall business; it grew 25% last year compared to 10% for the whole business. The direct revenue by goods shipped by the company itself grew 109%.

Groupon might eventually have to chuck its daily deals business and simply concentrate on becoming a mini-Amazon. If it does that, then it would be an interesting proposition. 

Bottom line
OpenTable shares still look expensive even after the sell-off this year. When you consider that the company expects growth to clock in below 20% going forward, its shares don't look that attractive.

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Note: A previous version of this article inaccurately stated OpenTable seated over 40 million diners overall since inception. This statistic refers only to the company's international operations. The Fool regrets the error.


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