OpenTable Can Serve Up $54 Despite Near Term Sluggishness

Shares of OpenTable (NASDAQ:OPEN) tanked by more than 9% on Monday following a report that the online restaurant reservation firm will likely end Q2 with its first ever quarter-over-quarter revenue decline since it went public in mid-2009. ^[1] The weak macro-economic conditions over the second quarter forced consumers to tighten their purse-strings leading to a decline in the total number of restaurant goers over the period, and this is consequently expected to show in OpenTable’s Q2 numbers as a fall in the number of diners making reservations.

We believe that the market has over-reacted to the news as we believe the setback will be temporary and ultimately not impact its long term value, and we maintain our price estimate of $54 for OpenTable’s stock. Aside from the sell-off on Monday, we attribute the near-30% price premium to the overall depressed share prices across sectors as a result of the deteriorating European debt crisis.

No Real Cause For Concern When It Comes To Reservations

Our analysis of OpenTable depicted in the chart above shows that nearly two-thirds of the company’s value can be attributed to online restaurant reservations. That goes a long way in explaining the drastic decline in the company’s share price over reports of a potential fall in its revenues for the quarter due to the lower reservations.

However, a reduction in the number of seated diners over a quarter and more particularly owing to macro-economic conditions is hardly a cause for alarm when it comes to OpenTable’s value proposition in the long run. OpenTable’s reputation in the online restaurant reservation industry gives the company a distinct advantage against numerous competitors that have cropped up in recent years – allowing it to post steady growth in the number of diners it seats quarter after quarter. Even if there is actually a decline in this number for a period, we believe it is best viewed as a temporary setback.

The Same Goes For New Restaurant Adds

The fact that restaurants did not see crowds the way they usually do over Q2 2012 could lead some to believe that new restaurants would be more reluctant to subscribe to OpenTable’s services at this time. If this were the case, OpenTable could end up reporting slower growth in its restaurant-customer base too Q3 as well.

In fact, restaurants who are potential customers could likely wait until later in the year when they expect spending to increase and an improvement in diner numbers before they sign up for OpenTable’s services. We believe this could extend the slow growth in the number of restaurants added by the company for a few more quarters. This is again not a major source of concern, as the effect would be largely temporary.

OpenTable is expected to release its performance figures for the second quarter in the first week of August.

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1. OpenTable Falls As Analyst Sees Sales Drop: San Francisco Mover, Bloomberg, Jul 2 2012 [↩]