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Shares of OpenTable (Nasdaq: OPEN ) have inched lower in each of the past three trading days, after the online dining reservations specialist filed for a secondary stock offering.
The move is intriguing on a few different levels:
- OpenTable didn't go public until four months ago, so having underwriters on speed dial appears a bit desperate.
- Unlike conventional deals that issue new stock, the shares being offered here -- as many as 3.8 million -- will all come from original investors and company executives. In short, the offering's not dilutive, even if it does bump up the public float. However, it represents a troubling wave of insider selling.
- The IPO was priced at $20, opened at $24.50, but has occupied a surprisingly tight trading range in recent weeks. In other words, this isn't a case of insiders trying to take advantage of recent gains, or express frustration with recent losses.
OpenTable's a recent buy recommendation in the Motley Fool Rule Breakers newsletter service, so I can't sugarcoat the offering. I'm not upset that early investors such as IAC (Nasdaq: IACI ) and venture capitalists are taking profits, but I don't like seeing a handful of executives unloading tens of thousands of shares apiece.
I'm also not a fan of secondary offerings that consist solely of insiders trimming their positions, since it feels like lead underwriters are tossing leftovers or hand-me-downs to their clients. There's no other way around this, though. The average daily trading volume on OpenTable is just 47,000 shares. Can you imagine how the stock would get pummeled if insiders chose to sell on the open market?
Nonetheless, I take comfort in knowing that OpenTable's model isn't broken. Barron's has a naturally bearish view of the matter, but it's going too far when it attacks the business.
"How many restaurants will pay fees to OpenTable during a tough time for the restaurant business?" Tiernan Ray asks rhetorically, before pointing out how comps at seafood chain McCormick & Schmick's (Nasdaq: MSSR ) have plummeted this year, and how liquor giant Diageo (NYSE: DEO ) is bellyaching over drinkers trading down to cheaper libations.
The question is answered several paragraphs later, when Ray points out that revenue grew at an "impressive but not jaw-dropping" 18% rate during OpenTable's first quarter as a public company.
Really? Business is in the gutter for high-end chains. Morton's (NYSE: MRT ) , Ruth's Chris (Nasdaq: RUTH ) , and McCormick & Schmick's are posting double-digit declines in comps. The Bennigans of the world are disappearing.
Along comes OpenTable -- with an 18% spike in revenue, and quarterly profits more than tripling -- and Barron's has the gall to wonder whether restaurants will warm up to the company's automated reservation services. The answer is right there! Over the past year, OpenTable's network has grown by 19%. Between its intuitive electronic reservation book system and the lead-generating benefits of its network effects, OpenTable is a life preserver to sinking eateries.
If OpenTable is growing now, just imagine how good things will be when the industry does turn around.
The secondary offering is a stinker, sure. But you should hate the players, not the game.
Interesting ways to profit from the IPO void: