For more than a month OpenTable’s (NASDAQ:OPEN) stock has remained below $40 levels. Goldman Sachs (NYSE:GS) recently initiated coverage on OpenTable with a price target of $44 and a “Neutral” rating. This begs the question whether Goldman is subscribing to the rumors that the reservation company may face off with Google (NASDAQ:GOOG)? We think yes, and we continue to stick to our $65 price estimate for OpenTable. OpenTable’s in for some difficult times in the near future, but we believe that this does not take away from the company’s potential value.
So why do we think Goldman has gotten it wrong?
OpenTable’s stock price drew a lot of skepticism early this year when its $100+ levels looked like a stretch when it came to valuing the company’s business using traditional valuation tools and models – primarily the too-high-to-be-true price to earnings (P/E) ratio.
But we believe OpenTable’s valuation in the long run includes potential value that has yet to be tapped. The biggest opportunity comes from the large customer database OpenTable has created over the years. The database of dining-related information volunteered by its registered users, including their location and contact details has not been monetized effectively by the company. This database could help OpenTable multiply revenues from its Spotlight and Advertising offerings to customers.
Google’s acquisition of Zagat in September raised fears that OpenTable was doomed by Google’s entry into this market. As detailed in its previous quarterly filing, OpenTable currently receives about 5%-10% of its reservations from diners who are brought to its website through partner sites like Zagat. And even if this number were to increase to 15% over the next five years, that cannot take much away from OpenTable’s growth in number of diners seated.
If Google really wishes to enter the online restaurant reservation space, it has all the cash in the world to acquire OpenTable. But, of course, things could start getting messy if the software giant picks up one of OpenTable’s competitors like Urbanspoon or Livebookings – which could lead to more direct competition. OpenTable has become a brand to reckon with when it comes to online restaurant reservation and Google’s entry does pose challenges, but we feel that there is room for both in this growing market.