OpenTable’s (NASDAQ:OPEN) shares reached a new 52-week low of $32.96 on Wednesday as the online-restaurant reservation company’s stock continues to lose value in the market. Notably, OpenTable’s shares are currently trading quite close to the $29 price they demanded at the time the company went public in May 2009 – not a very relevant detail if one were to keep out the fact that the same stock scaled a high of almost $119 in April this year. Since then, things have just been downhill in terms of the stock price. But what is it that is actually driving this frenzy for OpenTable’s stock – are there really some sound reasons for the extreme reactions the company has drawn from investors, or is this just another one of the tech-stocks that had its bubble burst? We think it is a bit of both.
For one, we believe that OpenTable’s stock is heavily undervalued as of now – obvious from the fact that we maintain a $65 price estimate for OpenTable; nearly double what its shares command in the market today.
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Expectations, and Stock Price, Rose with Good Reason Initially
OpenTable grabbed investor attention early last year, nearly 3 quarters after its IPO, when it announced its full-year results. While OpenTable’s business model of getting restaurants to pay for their software that allowed diners all across the country to book tables for free was novel, the company reported that nearly 40% of all full-service restaurants in North America were subscribed to its services.
This huge customer base meant it would be difficult for competitors, who were all very new to this business, to break any ice with restaurants. And with OpenTable’s plans to expand in other lucrative markets like the U.K., Germany and Japan, there was clearly a lot of value yet to be tapped.
These factors helped OpenTable’s share price double to around $60 by September 2010.
Then Came the Bubble…
In the last quarter of 2010, OpenTable made some significant moves. It first announced the acquisition of toptable.com – an established restaurant-reservation business in the U.K. The company also launched its mobile apps which would improve the use of its services by diner. And soon, it launched its Spotlight service in the U.S., which provided coupons for weekly offers at restaurants on the lines of Groupon. The euphoria already surrounding Groupon’s cash-minting business model rubbed off on OpenTable’s valuation in the market – as OpenTable was deemed a better option than Groupon at providing restaurant coupons because of its ability to target diners from its database. And Spotlight continues to contribute handsomely to the top-line.
But the market did not pay much heed to the problems that had crept up during this period. Competitors, notably Urbanspoon, had started putting pressure on OpenTable by providing similar services as lower costs – marketing this difference with the support of disgruntled restaurant customers who formerly used the “expensive” OpenTable service. Also, the saturating North American market and OpenTable’s international expansion plans were quickly driving up costs – taking away from the company’s bottom-line.
… and then the Skepticism
OpenTable’s inflated stock price balloon was punctured almost overnight when the company announced its performance for Q1 2011 in May this year, and investors woke up to the reality that the price quoted was way beyond reasonable. And the market then did what it is so good at doing when it is both skeptical and overtly optimistic – overreact.
The stock which had gained significant momentum on its way up, demonstrated more momentum on its way down – with the series of events hinting at a global economic downturn greasing the fall for OpenTable’s stock.
As investors continue to sell shares across sectors at the drop of a hat, OpenTable’s share price is expected to remain depressed at least for some more time in the near future. But it is just a matter of time before investors start putting their trust back on stocks like OpenTable.