OpenTable’s Worth $54 But Serves Up Higher Costs As Competition Bites

by Trefis Team
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OpenTable (NASDAQ:OPEN) released its performance figures for the first quarter of the year earlier this week, and it seems the online restaurant reservation company is finding it more difficult to keep up its growth story. [1] The company roped in $39.4 million in revenues for the quarter – 6% higher compared to the previous quarter and 17% above the period a year ago. But growing expenses wiped out a large part of this growth, with net income of $4.8 million significantly lower than the almost $7 million for Q4 2011. OpenTable also revised its revenue outlook for the year downward. The news clearly did not go down too well with investors – evident from the almost 22% decline in its share price within two days of the announcement.

We revised our price estimate for OpenTable’s stock from $55 to $54 to factor in the lower revenue outlook for this year. Our new price estimate is a good 50% above the current market price, as we continue to believe that there are several untapped potential revenue sources that OpenTable will realize in the years to come. Also, the current market prices are substantially depressed as we think investors have over-reacted to the company’s not-so-great earnings.

See our complete analysis for OpenTable

OpenTable Continues to Draw Diners In Large Numbers …

OpenTable’s reputation in the online restaurant reservation industry gives the company a distinct advantage against numerous competitors that have cropped up in recent years. The most obvious proof of this is the steady growth in the number of diners it seats quarter after quarter.

The company seated just under 30 million diners last three months – a good 34% more than the number of diners seated in Q1 2011 and about 12% more than those for Q4 2011. As seen in previous quarters, more than 90% of these diners were seated at restaurants across North America.

The steady growth in diners seated is a good sign for OpenTable, as the reservation revenue it generates from restaurants per diner is the largest source of value for the company – contributing two-thirds of the company’s estimated value, according to our analysis.

… But At What Cost?

As we have repeatedly pointed out in the past, OpenTable’s expenses are the biggest source of concern for the company, as they have consistently outpaced revenue in terms of growth in 4 of the last 5 quarters. The company has had to spend more to ward off competition in North America and to expand its reach in international markets.

OpenTable had done well last quarter by reining in expenses, but things seem to have gone out of hand again this quarter with costs rising from $26.4 million to just under $32 million. The company attributes this jump to an increase in stock-based compensation (a three-fold increase from $1.9 million in Q4 2011 to $5.9 million in Q1 2012).

Overlooking the stock-based compensation still points to an increase in cash expenses from $24.5 million to $26.1 million – a 6% increase that matches the top-line growth. OpenTable really needs to watch its costs lest it will eat away its profitability in the coming quarters.

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Notes:
  1. OpenTable, Inc. Announces First Quarter Financial Results, OpenTable Press Releases, May 1 2012 []
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