Here's Why OpenTable's Stock Is Overvalued

Apr. 4.13 | About: OpenTable, Inc. (OPEN)

OpenTable's (NASDAQ:OPEN) shares have seen a considerable jump in the last month from $55 apiece at the end of February to a high of $65 earlier this week - a level the online restaurant reservation company's stock hasn't seen since mid-2011. But is the rally in the share price really justified? Or is it yet another instance of the company's stock price being pumped up by a mix of momentum traders and optimists? In early 2011, OpenTable's share price rocketed from under $70 to almost $120 only to sink to $30 by the end of the year.

We believe that shares look fundamentally stretched and stick to our $55 price estimate for OpenTable's stock. Although the company has refined its mobile app offerings over recent months, there has really been no notable change to the company's business model, partnerships or core offerings to warrant the near-20% appreciation in value. Since our price estimate already includes a healthy growth in diners seated over the future as well as the potential impact of the Foodspotting acquisition announced in January (see OpenTable Looks To Boost Diner Growth With Foodspotting Acquisition), we think that the current share price is due to investors underestimating the effect of two important factors that bog down OpenTable's value: its loss-making international business and its increasing operational costs.

The International Business Isn't Going Anywhere, Yet

OpenTable's operations outside North America are becoming a serious concern due to losses they have piled on since the company decided to expand its business geographically. OpenTable currently focuses on a handful of developed nations outside of North America - namely the United Kingdom, Germany and Japan. Although the acquisition has given OpenTable a notable share of the U.K. market, the operations will need a few years to break-even.

The table below highlights the performance of OpenTable's international business over the years, and is based on data reported by the company:

International Business Results

($ thousands) 2007 2008 2009 2010 2011 2012
Revenues 1,547 2,779 3,845 8,883 20,864 22,294
Operating Income -5,830 -8,462 -5,907 -8,121 -11,384 -9,125
Cost:Revenue Ratio 477% 404% 254% 191% 156% 141%
Click to enlarge

The amount of value that the international business is eating into can be understood by the fact that we estimate OpenTable's share to be worth above $70, minus its international business (see OpenTable Would Be Worth $70 If You Ignored Its International Business).

Expenses Continue To Mount

OpenTable's stock value is very sensitive to its costs - something that can be best understood by making changes to the chart above which represents the company's SG&A expenses as a percentage of its gross profit. This figure has fallen considerably in the past, except for last year when it increased slightly. This rise can be attributed to the growing difficulty for OpenTable in adding new North American restaurants to its customer base besides the overseas expenses which we already detailed above.

A large part of OpenTable's restaurant customers are concentrated in a few metropolitan areas and as these areas have nearly been saturated, the company has been forced to incur additional costs over recent years to try and enlist more restaurants from smaller cities and other sparsely populated areas. Hence, although we forecast a gradual decline in SG&A expenses as a percentage of gross profit, in dollar terms this represents a doubling of SG&A expenses over the next five years - not something very far-fetched considering the fact that these expenses have grown by at least 30% over the last three years.

Disclosure: No positions