I'm a value investor, which means I'm not supposed to be interested in companies trading at 10 times sales. Yet here I am, drooling over OpenTable's
Here are the numbers the market cares about: Fourth-quarter revenues leaped 32% and earnings blew away analyst estimates. That's pretty heady stuff given the recession.
Now here are the numbers you should care about. First, OpenTable's installed base of restaurants rose 20% year over year, pushing its margin-rich subscription revenues up by a similar amount. Even better, though, was the 47% explosion in reservation revenues. In addition to ongoing monthly subscription revenues it pulls from restaurants, OpenTable also collects a small fee for each diner that is seated through its system. More diners are attracted to OpenTable's platform as the number of restaurants in its system grows. That's what we call a network effect, folks, and it should continue driving the number of seated diners per restaurant higher and higher.
Here's another number: 2 million. That's the total number of diners OpenTable has booked through its mobile apps on Apple's
OpenTable has several qualities we look for at Inside Value: It is a market leader, scalable, capital-light, has high switching costs, and benefits from a growing network effect. That's a winning formula that should sound familiar to investors of one of our favorite businesses: Paychex
Still, there's no real getting around the frothy valuation. Also troubling is that the company's stock-based compensation is pretty fast and loose. Nonetheless, keep your eye on OpenTable for a meaningful pullback -- for now, it will remain a great business at a bad valuation.