OpenTable: Pros Have Reservations After 147 Percent Jump

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Investors are queueing up to buy shares of OpenTable (OPEN), the Internet company that allows customers to make restaurant reservations online. After reaching a record closing high on Sept. 10, the shares have jumped an additional 10.4 percent in three days. Shares at one point traded 5.9 percent higher on Sept. 15 and closed at a record 62.80.

The stock is up 147 percent so far this year.

Now the question is whether, with shares at record prices and near a record price-earnings ratio, the stock is getting overbooked. OpenTable's p-e ratio—a common measure of how cheap or expensive a company's shares are—is 161. The p-e of the broad Russell 3000 stock index is 16, while the Standard & Poor's 500's Internet Retail index, which includes (AMZN), has a p-e of 47.

In its home country, the U.S., San Francisco's OpenTable dominates its industry. Citigroup (C) analyst Mark Mahaney estimates the company has more than a 90 percent market share in the U.S. online restaurant reservation business. Moreover, there is room to grow, he argues: Less than 10 percent of U.S. restaurant reservations are made online, while online sales make up 60 percent of sales of such events as concerts and sporting contests.

"Their competitor is the phone," says James Cakmak, an analyst at Sidoti & Co. "There's no doubt they're the dominant player. Their market position is secure."

Reversing His Opinion

Shares climbed 8.8 percent on Sept. 13 after Citi's Mahaney upgraded his rating on the stock to buy from hold, saying his earnings expectations had risen 10 percent for 2011 and 19 percent for 2012. In a research note, Mahaney acknowledged he was telling investors to buy OpenTable less than three months after he told them, in June, that the shares were too expensive.

"Why? How?" Mahaney wrote. "The facts have changed. Materially." He cited the initial results from OpenTable's experiment offering restaurant coupons, as well as the prospect of increased use by smartphone users.

Then on Sept. 15, Chief Executive Officer Jeffrey Jordan made an announcement that the stock market took as the week's second piece of good news. OpenTable said it would acquire its chief British competitor, Toptable, which operates the website, for $55 million in cash.

"We believe the acquisition of Toptable affords us the opportunity to accelerate our U.K. business," Jordan said on a conference call with analysts. He expects the acquisition to incur transaction costs of $1 million before the end of the year, but he also said the buyout should add to 2011 profits.

Profit Is Soaring

The argument for OpenTable is bolstered by recent success. Last quarter, revenue jumped 37 percent from a year earlier, to $22.45 million. Profit is up more than threefold, with net income rising 273 percent from a year earlier.

More than 14,000 restaurants are connected to OpenTable's reservation network, which allows users to see in real time which restaurants have tables available. Its website saw 1.35 million unique visitors in August, according to ComScore (SCOR). With so many restaurants and users, Citi's Mahaney argues OpenTable may have reached a "tipping point."

"The consumer selection has gotten better, leading to higher reservation activity," Mahaney wrote.

Achieving a Critical Mass?

Talking with analysts on Sept. 15, Jordan, the CEO, said a similar critical mass was the company's ultimate goal in the U.K. "The more consumers you have using the network, the more attractive it is to restaurants," he said. "The more restaurants you have using the network, the more attractive it is to consumers."

The company can use its large base of Web visitors and restaurants to branch out into other areas. OpenTable is rolling out a service it calls Spotlight, offering consumers weekly gift certificate coupons to OpenTable restaurants. As such, OpenTable is competing directly with Groupon, the Internet company that offers a "deal of the day" in local markets. Bloomberg News reported that Groupon founder Andrew Mason on Sept. 15 said the privately held company has a waiting list of 35,000 local businesses looking to offer discounts on its site.

Citi's Mahaney said OpenTable's Spotlight, now available in only six cities, could generate $18 million to $24 million in new revenue by 2012.

Despite OpenTable's recent results and growth prospects, only four of 11 analysts surveyed by Bloomberg have a buy rating on the stock.

Sidoti's Cakmak has a neutral rating. He says he doubts the extent of OpenTable's growth prospects in smaller U.S. cities. Reservations aren't as necessary to dine out in less dense cities, he says, compared with such places as New York, Chicago, or Los Angeles, where OpenTable is a strong presence.

His main concern, however, is the company's expensive valuation.

Even such a pricey stock can generate returns, Cakmak says, but only if it grows very quickly. "Given the lofty expectations of sell-side [analysts] and investors, we see little room for error," he says.

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