CNBC gunslinger Herb Greenberg took aim at web-based reservations specialist OpenTable (Nasdaq: OPEN) yesterday.
By his own admission, Greenberg likes to get in front of speeding trains. It's what he does, and occasionally he times it just right -- knocking a market darling as it's about to derail.
He's probably more notorious for when he gets it wrong -- like bashing Netflix (Nasdaq: NFLX) in 2005. He accused the DVD rental specialist of managing earnings and posting deceptive churn rates. The stock has gone on to be one of the market's best performers.
He bit into Green Mountain Coffee Roasters (Nasdaq: GMCR) two months ago, but that came after the company behind the Keurig single-cup brews was being investigated by the SEC for flawed accounting practices. It remains to be seen how Green Mountain will emerge from the thorny implications, but the stock has already gone on to make up most of the ground it lost after the scandal broke.
Ripping into OpenTable -- a stock with heady momentum, a brief but consistent history of posting market-thumping results, and no SEC watchdogs sniffing about -- was a gutsy move by Greenberg, just hours before it posted its third-quarter results.
Check, please
The "Herb Alert" seemed like a bit of a stretch.
His bearish argument centered around four major components.
- OpenTable shares are expensive.
- Revenue per restaurant is "likely to start falling."
- It is now undercutting its flagship model with a discounted offering.
- Sequential revenue growth is falling.
These would be the four horsemen of the apocalypse -- if only they were real.
Let's tackle the valuation argument. OpenTable has more than tripled since last year's IPO. The stock has never been cheap on an earnings basis. I remember a scorching Barron's treatise last summer, claiming the stock was overvalued at 68 times the following year's earnings. Well, the stock has gone on to double -- though the forward earnings multiple hasn't kept up the pace because analysts continue to revise estimates higher after every quarterly beat.
Revenue per restaurant slipping would be troublesome. It would make it harder for eateries to justify the capital expenditures to maintain OpenTable's electronic reservations book.
Why would that happen, though? In the second quarter, North American restaurants grew by 23%, but revenue grew a heartier 36%. A restaurateur's decision to go with OpenTable was making more economic sense.
As for the discounted model -- one that just 282 of OpenTable's more than 14,000 restaurants had opted for as of the end of June -- this is OpenTable Connect. It is a scaled back, web-based platform designed primarily for small eateries that rely mostly on walk-in traffic but would like to generate some reservation leads through OpenTable.com. It is OpenTable's response to IAC's (Nasdaq: IACI) Urbanspoon testing out its iPad-based RezBook.
Connect is not a realistic substitute for OpenTable's electronic reservations book that merges phone reservations with online queries and collects just enough data to provide customized dining experiences. It's an incremental channel for bistros that never would have come to OpenTable anyway.
Finally, we get to the "sequential revenue growth is falling" claim. At first glance, one may interpret that to mean that sequential revenue is actually falling. However, the $22.5 million in second-quarter revenue is clearly ahead of the $21.3 million it rang up a year earlier.
No, what Greenberg is referring to is a deceleration of the growth itself. This isn't fatal. Speedsters decelerate. Even the mighty Baidu (Nasdaq: BIDU) isn't growing as quickly as it used to. As long as the overall growth rate is healthy, big deal.
Just desserts
The battle between a speeding train and Greenberg's stare down ended with a splat last night.
Shares of OpenTable popped 15% higher in after-hours trading last night.
Yes, the report was that good. Revenue soared 44% to $24.5 million. Did you see that Greenberg? That's accelerating sequential revenue growth. Non-GAAP earnings more than tripled to $0.23 a share, well ahead of the $0.15 a share that analysts had ordered. Valuation pundits, don't forget to shave those P/E ratios lower.
Finally, we get to that falling-revenue-per-restaurant metric that Greenberg was warning CNBC viewers about. Well, OpenTable's base of North American restaurants has grown by 26% over the past year, but the revenue from those eateries has surged 43%.
Help! I've risen and I can't get down.
Obviously, Greenberg is a bright guy. We've all made bad calls. I've made plenty. I knocked Greenberg's bearish argument on Krispy Kreme (NYSE: KKD) six years ago. He won. I was glazed.
However, there's a lesson to be learned here about building up a phantom bearish argument ahead of an earnings report for a company that has spanked analysts on a quarterly basis.
OpenTable is the real deal, and this is before we get to truly bake in its recent TopTable acquisition and the Groupon-esque voucher initiatives that OpenTable, Yelp, and Travelzoo (Nasdaq: TZOO) have been testing lately.
Why is everyone knocking OpenTable when they can smell the crow simmering in the kitchen?
Have you ever avoided a stock that seemed overpriced, only to find it trading substantially higher later? Share your thoughts in the comment box below.
