Shares of the online restaurant reservation leader OpenTable (NASDAQ:OPEN) lost 5% of their value over trading Wednesday, 22 May, in a sell-off which was quite ironically triggered by the Restaurant Industry Index data for Q1 2013, released by the company earlier in the day.  The index figures released by OpenTable every quarter based on data it collects from its restaurant customers spread across North America, serves as a proxy for the overall growth in the restaurant industry. Investors clearly did not like the fact that the index shows a marked decline in the number of diners at restaurants throughout the region for the quarter.
We stick to our price estimate of $56 for OpenTable’s stock, which is nearly 10% below the current market price despite the decline on Wednesday. We detail our belief that the shares look fundamentally stretched in the article Here’s Why OpenTable’s Stock Is Overvalued.
OpenTable is the undisputed leader in online restaurant reservation segment with nearly 50% of all full-service, reservation-taking restaurants in North America enrolled as its customers. While this position of strength allows it to post strong growth in the number of diners it seats at these restaurants, a slowing growth in the overall number of restaurant goers clearly does not bode well for the company’s business model, which draws more than two-thirds of its value from reservation revenues, something demonstrated clearly by the chart above.
A year ago, in what came as the first instance of the company turning toward the customer database it has amassed over the years to offer a non-advertising service, OpenTable launched the Restaurant Industry Index to help track the overall performance of the reservation-taking restaurant segment (see OpenTable’s New Index Opens Potential Revenue Channels). The index has been a regular quarterly feature since then.
But the index data for this quarter painted a rather poor picture for the industry, with quarter-on-quarter declines across almost all major metropolitan areas in the country, as well as for the North American region (U.S., Canada and Mexico) as a whole. A glance at the data immediately shows the reason for investor pessimism – the last time there was a decline across the region was in the aftermath of the economic recession in 2009.
|Geographic Region||2009||2010||2011||2012||1Q 2012||1Q 2013|
|Atlanta Metropolitan Area||-8.50%||3.00%||0.20%||0.70%||3.80%||-4.50%|
|Boston Metropolitan Area||-2.70%||3.90%||1.50%||1.50%||5.30%||-3.20%|
|Chicago Metropolitan Area||-5.70%||1.40%||2.90%||-0.10%||3.30%||-4.30%|
|Denver Metropolitan Area||-5.90%||3.20%||2.60%||0.40%||-0.30%||1.40%|
|Metropolitan Los Angeles||-9.70%||0.90%||2.90%||0.90%||0.00%||-0.80%|
|Metropolitan New York||-5.80%||4.30%||2.60%||0.30%||4.70%||-2.80%|
|Philadelphia Metropolitan Area||-7.40%||-0.40%||0.80%||0.20%||3.30%||-4.80%|
|San Francisco Bay Area||-8.60%||1.70%||5.20%||1.50%||3.20%||1.30%|
|Washington D.C. Metropolitan Area||-2.80%||3.00%||1.30%||-1.80%||-1.60%||-1.20%|
The slowing number of diners would imply that people have tightened their purse strings and are cutting down on discretionary spending in anticipation of the economy turning for the worse. And although this decline did not show in OpenTable’s performance for the first quarter, when the company recorded a 14% increase in the number of seated diners compared to the same quarter last year (see Mobile Offerings Boost OpenTable’s Earnings; $56 Fair Value), it is not too difficult to predict that the slowing growth will catch up with its figures in the near future, if the trend continues.
This will weigh heavily on the company’s value, something that can be understood by reducing the number of diners seated by OpenTable at each of its North American restaurant customers, as shown in the chart below.Notes:
- OpenTable Releases Restaurant Industry Index for Q1 2013, OpenTable Press Releases, May 22 2013 [↩]