A recent note from Seeking Alpha said that OpenTable's rich valuations prompted a closer look. In OpenTable's recent earnings report, 2010 net operating income was $17.9 million. The company has a $2.06 Billion market cap. The combination means that the company's earnings are about 0.86% of what you are paying as a shareholder. According to the report, a shareholder could invest in a CD and have the same yield without the risk of a huge decline in equity value. At this high valuation, the share price could tumble any time.
OpenTable does not have much, if any competition, and analysts of the company have made this known. A recent report from Forbes projected OpenTable's growth into the year 2017, without taking into account any competition that may come along. According to the National Restaurant Association, there are about 960,000 restaurants in the U.S., and according to OpenTable's last earnings report, the company said that almost 14,000 restaurants use its services. Does this mean that OpenTable has hardly scratched the surface of the market? Not necessarily.
OpenTable is a free service for the dining guests, and it makes its money mainly through restaurants using its services. OpenTable's reservation service costs restaurants about $1 per diner when the reservation is made through the website and $0.25 when the reservation is made through the restaurant's website. Depending on the size of the restaurant, the type of clientele, and the prices charged per dish, this could potentially result in large overhead. There are many types of restaurants that can't afford the overhead like fast-food restaurants and many other establishments like smaller, family-owned Asian, Mexican, and even bar-b-q restaurants, that charge between $3-$10 per meal, would probably not do business with OpenTable because of the high cost per diner. In this case, the possible profit per diner could be staggeringly low.
Competition for OpenTable could enter the marketplace very easily. Since there are nearly a million restaurants registered with the National Restaurant Association, the NRA could easily set up a site that includes the services that OpenTable provides for free with their membership. The NRA wants to increase its membership, so why wouldn't it create a model like this?
In today's economic climate, everyone is trying to save money when possible, and when margins are already drastically low, so spending potentially $1 per diner could really take a bite out of profits. Should competition come along from the NRA, or anyone else, OpenTable's valuation could crumble, and the share price could collapse.
Disclosure: No position in OPEN
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