OpenTable (NASDAQ:OPEN) derives more than three-quarters of its value through reservations and subscriptions that account for 59% and 20% respectively of the $84.25 Trefis price estimate for the company’s stock. While OpenTable’s online reservation service is free for diners, the company charges its restaurant customers a reservation fee for each diner who reserves a table at the restaurant using OpenTable’s system. This is reported by the company as its total reservation revenue. OpenTable also charges restaurants a monthly subscription fee for the use of its proprietary software and hardware, which constitutes its subscription revenue. The company faces increasing competition from Urbanspoon – owned by IAC/InterActiveCorp (NASDAQ:IACI) – as well as UK-based companies liveRES Ltd and Livebookings Ltd. in the online restaurant reservation market. The company also competes with Groupon (NASDAQ:GRPN) by selling third-party restaurants coupons through its website.
Here, we highlight 4 of the most important drivers for OpenTable’s stock and the upside/downside potential.
1. Reservation revenue per North American diner: OpenTable earned slightly more than 70 cents per diner it seated in North America in 2010.
2. Diners per North American restaurant: An average of 4,500 diners per OpenTable restaurant-customer in North America used the OpenTable system to make a reservation in 2010.
3. OpenTable Gross Profit Margin: OpenTable achieved gross margins of nearly 60% in 2010.
4. Advertising Revenues: OpenTable roped in an estimated $4 million in revenues from advertising in the year 2010.
24% Upside Scenario | $104 Trefis Price Estimate
1. Higher reservation revenue per diner (+5%):
OpenTable provides its online restaurant reservation service to diners for fee, generating revenue by charging restaurants a fee for each diner it seats. The company charges restaurants $1 for each diner seated through the opentable.com website, and 25¢ for each diner seated through the restaurant’s own website. Through this pricing structure, OpenTable has seen an increase in revenue per diner from 68¢ in 2007 to 71¢ in 2010.
This increase represents faster growth in the number of diners using the opentable.com website and the OpenTable mobile application compared to restaurant websites for making reservations.
While we expect this trend to continue in the future, the increasing popularity of the mobile app can significantly boost average revenues for OpenTable in the years to come. If the average revenue per diner in North America continues to grow and reaches 85¢ by the end of our forecast period, then the Trefis price estimate will see a 5% upside.
2. Increasing popularity of OpenTable (+10%):
The number of diners in North America making reservations through OpenTable has multiplied over the years – increasing 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.
U.S. restaurants census data shows that there were nearly 30,000 diners per restaurant in 2007, and this number has grown by about 3.5% annually. The OpenTable reservation system, hence, is used by less than 15% of diners. Assuming number of diners continue to grow at 3.5%, we expect this number to reach 25% by the end of our forecast period – representing about 11,200 diners per restaurant in North America.
But with OpenTable already enlisting more than 50% restaurants in North America as its customers, if 30% of diners use OpenTable by the end of our forecast period, this would imply about 13,500 diners per restaurant. This represents a 10% upside to the Trefis price estimate.
3. OpenTable margins continue to improve (+5%):
OpenTable’s profit margins have improved over the years, increasing from just above 50% in 2008 to almost 60% in 2010. This has been due to the slower growth in operating expenses compared to the revenue.
While we currently anticipate further improvements in margins to 66% by the end of the forecast period, the company’s strong presence in North America could help it further cut operating costs in the region and can boost margins to 70%. This would mean a 5% upside to the current Trefis price estimate.
4. Advertising revenues grow at a faster rate (+4%):
Advertising revenue has been a small part of OpenTable’s revenue in the past, contributing about half a million dollars in 2008, and reaching almost $4 million in 2010.
Restaurants pay for promotional listings on OpenTable’s website under various categories, including the “1,000-point Restaurants.” OpenTable also charges restaurants $7.50 per diner making a reservation through these promotional listings.
We believe that the diner information database that OpenTable has been able to create over the years represent an enormous revenue potential – which can boost advertising revenues to nearly $25 million by the end of the Trefis forecast period. But with OpenTable on the look-out for better ways to increase advertising revenue, this figure could touch $40 million over the same period – representing a 4% upside to our price estimate
27% Downside Scenario | $63 Trefis Price Estimate for Cliffs Natural Resources
1. Average reservation revenue begins to fall (-8%):
OpenTable’s success has spawned a number of competitors providing online restaurant reservation services at lower per diner fees. Moreover, competitors are attempting to address an issue commonly raised by many of OpenTable’s existing restaurant customers – the need for them to shell out 25¢ for each diner using the restaurant’s own website to make a reservation.
OpenTable may need to revise its per diner fees with increasing competitive pressures. Considering the situation that OpenTable drop’s its 25¢ fee for diners reserving through restaurant website from 2012, then our forecast will see a nearly 11¢ drop over current estimates by the end of the period. In such a scenario, our price estimate will see an 8% downside.
2. Decline in growth rate of number of diners (-10%):
We currently estimate that the number of diners per North American restaurant using OpenTable will increase rapidly from its current level and cross 11,000 by the end of our forecast period. This corresponds to a 20% annual growth in the number of diners using OpenTable.
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 8,500 by the end of our forecast period. This would mean a 10% downside to the Trefis price estimate.
3. OpenTable’s profit margins stay flat (-8%):
OpenTable’s operating costs in the last 2 years has grown notably faster than in previous years – largely due to the increasing focus by the company in expanding internationally. With the company unable to completely replicate its strategy in North America at newer locations like UK, Japan and Germany as of now, costs may continue to grow in step with revenues. Also, increasing competitive pressures may also lead to margins stagnating around the 60% level.
Such a scenario would represent a ~8% downside to the Trefis price estimate.
4. Advertising revenues grow slower (-2%):
Our current estimates of advertising revenues reaching $25 million by the end of the Trefis forecast period may prove too optimistic if the company is not able to effectively monetize the potential its diner information database holds.
If revenues only reach$15 million by the end of our forecast period, then this would represent ~2% downside to the Trefis price estimate.