Towards the end of 2011, we had attempted to reason why the online restaurant reservation company OpenTable (NASDAQ:OPEN), once an investor favorite with shares reaching $120 apiece, fell from grace within months to end up below $50 a share – a level it has remained at for quite some time now (see So What’s Going on with OpenTable’s Stock?). From the looks of it, all the initial euphoria surrounding the company seems to have settled down. Undoubtedly, the fact that its now discontinued deal-based offering Spotlight hardly lived up to the hype it generated or that its international business continues to bleed cash with positive returns nowhere in sight (see OpenTable Would Be Worth $70 If You Ignored Its International Business) are concrete reasons for the rapid decline in its share price. But these factors hardly compare to the magnitude of downside presented by the slowing growth in the number of diners using its services.
We maintain a $52 price estimate for OpenTable’s stock, about 15% above the current market price as we believe that there are several untapped potential revenue sources that OpenTable will realize in the years to come.
The Relationship Between OpenTable’s Diners Seated & Share Value
It is hardly a surprise that the biggest source of value for the online restaurant reservation company is the revenue it generates by seating diners at restaurants. While OpenTable’s services are free for diners, restaurants shell out a dollar for every diner who is seated through the opentable.com website or mobile application. Besides this, OpenTable makes money through monthly subscription charges, one-time installation charges and optional advertising charges from restaurants.
Our analysis of OpenTable shows that nearly two-thirds of the company’s value stems from its reservation revenues – something visible in the chart above. Again, this is not too difficult to understand considering that the company’s annual reports highlight how the share of reservation revenues have grown from 41% of total revenues in 2007 to 53% in 2011. And our forecast pegs this figure at 70% by the end of our forecast period.
Which Is Both Good and Bad News
OpenTable cannot increase reservation fees: its services are already seen as very expensive, and competitors have been capitalizing on this to expand their own customer base for a while now (see Competitors Look to Topple OpenTable With Low Fees). This means OpenTable’s share value – at least given its current business model – depends almost entirely on its ability to attract more diners to use its services.
|Quarter||Diners Seated||% Growth|
|Q1 2009||10.11 million|
|Q2 2009||10.28 million||1.67%|
|Q3 2009||10.34 million||0.62%|
|Q4 2009||12.14 million||17.40%|
|Q1 2010||14.50 million||19.45%|
|Q2 2010||15.59 million||7.53%|
|Q3 2010||15.90 million||1.96%|
|Q4 2010||19.36 million||21.78%|
|Q1 2011||22.42 million||15.81%|
|Q2 2011||23.81 million||6.20%|
|Q3 2011||23.59 million||-0.96%|
|Q4 2011||26.85 million||13.84%|
|Q1 2012||29.97 million||11.62%|
|Q2 2012||30.28 million||1.04%|
|Q3 2012||29.74 million||-1.79%|
Diners Seated By OpenTable Per Quarter (Source: 10-Q Filings)
If you go through the table above which shows the number of diners OpenTable seated in each quarter since 2009, there are some obvious trends that seek attention. The company normally sees a spurt in the number of diners in the first and fourth quarters of the year, with the second quarter showing moderate growth and the third quarter being the slowest – often ending up with a decline in the number of diners.
Even as the company has achieved the formidable feat of increasing the number of diners it seats in a quarter three-folds over the three years, the growth engine seems to be slowing down. The overall sluggishness in the economy over recent quarters no doubt has a role in depressing diner growth, as people are thinking harder before spending their money. But that only makes things worse as the situation is expected to continue in the near future with the fiscal cliff at hand.
So how much can slowing growth in diners affect OpenTable’s share value, you ask. You can get a clear idea of that by making changes to the chart below, which represents the average number of diners per North American restaurant that subscribes to OpenTable’s services. To put things into perspective, we worked out the figure for the extreme situation that the number of diners using OpenTable to make their restaurant reservation remains stuck at the current value of around 30 million per quarter. In that case, OpenTable’s shares would be worth just about $31 – a good 40% lower than our current estimate of $52.