Competitors, expansion plans weigh on OpenTable
If the restaurant reservation site's increasing spending outpaces revenue growth, margins will take a serious hit.
The company's shares are currently trading at around $40 apiece. This is not far from the $45 and $49 price targets with which Goldman Sachs (GS) and Credit Suisse (CS), respectively, initiated their coverage of the company recently. A few weeks ago, we presented our views on the extreme fluctuation witnessed in the online restaurant reservation company's stock price last year.
But we still stick to our $65 price estimate for OpenTable, with our reasons for this stance detailed in our article "Does OpenTable really have to worry about Google?." We, however, do acknowledge the fact that there are some plausible scenarios that present a significant downside to our price estimate. In this article, we enumerate what we believe are scenarios which lend the largest downside to our $65 target.
International expansion could blow up expenses
OpenTable's expenses continue to grow rapidly with the company spending more in both the saturated North American market as well as the recently entered international markets. We have already factored this point in our analysis of OpenTable. This can be visualized in the chart below. Note that although SG&A as a percentage of revenues is seen to decrease in this chart, this represents a nearly 10% year-on-year increase in OpenTable's SG&A expenses in dollar terms.
While we recognize that a rapidly growing company must spend in order to sustain its growth, if OpenTable's increased SG&A spend keeps outpacing revenue growth, as it has in recent quarters, then margins are going to take a serious hit. To understand the impact, if we consider a scenario in which the year-on-year growth in SG&A expenses is 15% instead of the 10% assumed now, our price estimate changes to just above $55 – a 15% decline from our $65 price estimate.
Competitors may force a reservation fee reduction
OpenTable charges restaurants 25 cents per diner who reserves a table through the restaurant's own website, and $1 per diner who reserves through opentable.com or using the OpenTable mobile application. Through this pricing structure, OpenTable has seen an increase in the effective revenue per diner from 68¢ in 2007 to just above 70¢ now.
Data about per diner revenues and total number of diners seated provided by the company in its annual reports. This data helps conclude that currently about two-thirds of the diners make reservations at restaurants using the opentable.com website or through the mobile app, with the rest using the restaurants' own websites. And the former category is clearly expected to grow at a much faster rate than the latter as OpenTable continues to gain popularity among diners.
But increasing competition in online restaurant reservation industry -- primarily from Urbanspoon and Livebookings -- could force OpenTable to rethink its pricing strategy. The competitors are already trying to undercut OpenTable by capitalizing on the growing dissent among restaurants over the 25 cents-per-diner OpenTable charges for reservations through the restaurant's own website. As restaurant owners believe that OpenTable does not bring them these diners, they are reluctant to pay these charges, which all of OpenTable's competitors have waived off.
Considering a scenario where OpenTable is forced to waive off the 25 cents-per-diner fee, the per diner reservation revenue will fall to 58 cents for 2012 and will likely settle at just above 60 cents at the end of our forecast period. This shaves off more than 10% from our $65 price estimate, as you can see by making changes to the chart above.
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