OpenTable expenses rising, but stock still worth $55

Although management expects costs to increase next quarter, we still see untapped revenue sources for the future.

By Trefis Feb 15, 2012 12:54PM
Image: Woman Paying the Bill (© Fuse/Getty Images)Last week, we summed up OpenTable's (OPEN) fourth-quarter results in OpenTable Shows Resilience Despite Tough Climate. Although the report showed a good performance for the period, shares of the online restaurant reservation company tanked 11% after the release.

The market clearly responded to the bits and pieces of information provided by the company during the earnings call about ongoing changes to its business model. These changes, coupled with the outlook presented by management for the year, warrants a reduction in our price estimate for the company's shares from $65 to $55.

Below we highlight the main factors that led us to revise our price estimate downward by 15%. Our new price estimate is still more than 20% above the current market price, as we continue to believe that there are several untapped potential revenue sources that OpenTable will realize in the years to come.

At the end of Q4 2011, OpenTable reported in its corporate presentation that 44% of all reservation-taking full-service restaurants in North America subscribe to its flagship Electronic Reservation Book (ERB) offering. On the other hand, market penetration among primarily walk-in restaurants using OpenTable Connect is around 9%.

The company is looking to increase focus on the pay-as-you-use Connect service to boost that figure in coming periods. However, as OpenTable Connect does not bring in any subscription revenues, the effective subscription fee per registered restaurant would decline as the number of OpenTable Connect users increase faster than ERB's.

OpenTable Subscription Revenue per North American Restaurant

At the end of Q3 2011, OpenTable management decided to pull the plug on its Groupon-like restaurant group-buying coupon service dubbed Spotlight. The service apparently did not strike the right chord with full-service restaurants who prefer not to give out coupons.

We thought Spotlight held a lot of promise in our earlier analysis, predicting that the service could contribute to as much as 10% to OpenTable's $65 value. Clearly that projection needs to be revised since OpenTable halted Spotlight deals completely in late January.

OpenTable's expenses have risen rapidly in the recent quarters as the company spends more in saturating the North American market as well as recently entered international markets. As we pointed out earlier, the decrease in overall expenses for the quarter seemed to be a one-off event, as management expects costs to increase by 15% sequentially in Q1 2012 and increase modestly thereafter. Our forecasts for OpenTable now incorporate that guidance.

OpenTable SGA Expenses as Percentage of Gross Profit
You can read more about the main factors driving our views in Does OpenTable Really Have to Worry About Google?

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