Upside and Downside Scenarios for OpenTable

OpenTable (NASDAQ:OPEN) is the largest provider of free and real-time online restaurant reservations for diners in the U.S. It competes with Urbanspoon, owned by IAC/InterActiveCorp (NASDAQ:IACI) and other UK-based companies like liveRES Ltd and Livebookings Ltd.

OpenTable’s share price has grown nearly three-fold from a roughly $30 value following its IPO in May 2009. The stock’s current market price stands around $85. The stock price actually breached $95 earlier this month, soon after the company declared better-than-expected earnings for the fourth quarter of 2010.

We updated our price estimate for OpenTable stock to $94.90 after the earnings release, taking into consideration the value that exists in the online-restaurant reservation market around the world, and also the value OpenTable stands to gain from the sale of online restaurant discount coupons.

The revenue generated by OpenTable by diners making reservations through the OpenTable website, the restaurant’s website, or even through OpenTable mobile phone applications are the biggest source of value for the company. Our analysis shows that almost 60% of OpenTable’s value can be attributed to reservations.

Below we highlight upside and downside scenarios for our OpenTable price estimate based on the outlook for drivers affecting the company’s reservation revenues.

12% Downside – Slow Increase in Number of Diners Using OpenTable for Reservations

OpenTable has seen substantial growth in the recent past from the number of diners using the OpenTable system to book tables online. The number of diners in North America making reservations through OpenTable has increased from 24.6 million in 2007 to 62.4 million in 2010. This corresponds to an increase in the number of diners per North American restaurant making reservations through OpenTable from 3,330 in 2007 to more than 4,500 in 2010.

We estimate that the number of diners per North American restaurant (using OpenTable) will increase rapidly from its current level and reach 10,700 by the end of 2017. This corresponds to a 20% annual growth in the number of diners using OpenTable, to more than 250 million in 2017.

Should our 20% annual growth forecast prove aggressive, and the pace instead falls closer to 15%, the number of diners per North American making reservations through OpenTable would reach roughly 8,000 by the end of our forecast period. This change shaves off almost 12% from our estimated share value, bringing the value to less than $84.

5% Upside – More Diners Using OpenTable.com than Using Restaurant Websites

OpenTable charges restaurants 25¢ per diner who reserves a table through the restaurant’s own website, and $1 per diner who reserves through the OpenTable website or using the OpenTable mobile application. Through this pricing structure, OpenTable has seen an increase in revenue per diner from 68¢ in 2007 to 71¢ in 2010.

In estimating the revenue per diner for years to come, we assume a 15% growth in the number of diners using restaurant websites, and a 30% growth in the number of diners using OpenTable.com and the OpenTable mobile application. This led to our conclusion that OpenTable’s revenue per diner will increase to 79¢ by 2017.

But if the number of diners using OpenTable’s site or mobile application to make reservations increases to even 32%, the per diner revenue could increase to 87¢ by 2017. This would imply a 5% upside to our $94.90 price estimate, bringing our number very close to the $100 mark.