It's Time to Think About Shorting Open Table

Valuation alone is never a reason to short a stock - not even when it is 487 times current earnings. Slowing growth can be a reason for shorting a stock - a momentum stock that goes from a 100% to a 20% growth rate in less than two years. A secondary offering that sells no company shares but insider and private investors shares - is that a warning sign? Or how about a company touting international sales - that equal one million dollars (that is million with an M, not billion with a B)?

The company in question is Open Table (OPEN), a terrific service, a slowing company, a completely ridiculous stock.

Let me begin by saying my wife and I love the service and use it all the time; it has simplified going out in our home town and when we travel. No knock on the service - in fact, the efficacy of the service has made OPEN something of a cult stock.

Where can I start? With management and early investors that cashed out through a secondary offering - generating roughly $200 million from investors, for previous investors, not the company. Smart move in a rough economy, eh? Not to mention how much faith it shows current investors and management have in the stock price.

How about the end of the lock up agreement from the IPO on May 21 in a few days? Think anybody who owns the stock at $20 might want to bag a 40% profit in light of all the private investors and senior managers selling through the secondary offering? Including Benchmark Capital, which owns (or owned) 3.3 million shares, you think they might want to distribute the stock to investors/LPs (a rumor) and book the profit on paper before the stock crashes?

Or let's look at growth potential - true, it's excellent growth, 20% per annum, down from something like 100%. At this rate, assuming profits climb again half as fast, the company will only need to grow 20% a year for 10 years to trade at the current market multiple.

I usually prepare longer analyses - and could do so here, tearing apart all their statements and whatever but there is no point. A wonderful service - but with management and early investors cashing out, a lock up ending on November 21 and a valuation multiple greater than that ever held by Microsoft (MSFT) in its great growth years, well, it is time to start thinking about shorting the stock. A fair price based on growth above the economy and the current market multiple is between $.50 and $5.00. As I write this, the stock is trading at $27 and change.

Take a look, now - short interest is rising quickly but with the lock up expiring, a successful locate is going to be much easier for those of you who take action.

Author's Disclosure: None.

Comments

[Scootger:]

problem is you are shorting an superilliquid equity, a monopoly(they have no competition to annouce they are taking share or eating their lunch, great reasons to short any other company you dont like), and a recent IPO that can trade in your face if the mkt decided to run another 10%, which it most likely will into year end...if this company does perform a tad and beat a q here or there the momentum guys will walk it up in your face...you are correct in saying that the valuation does not make sense, but i can give you 500 other companies that are trading at extended valuations too...anyone that owns the stock here has certainly taken profits and is playing with the houses money and stocks do not react to lock up exp's until a few weeks or a month prior, and in bull mkts expiration pressure is viewed as a buying oppty for anyone looking to accumulate... the only longs worries about this situation are the people locked up at this stage in the game as the ipo has been a success for instututional people. i.e. no one is "trapped" in the name...friendly advice, wait for a catalyst that drives the stock up to short and play small, entry points are the key and bears get run over in up tapes shorting "potential" growth stories.

Nov 15 11:57 AM

[godzilla56:]

Hummm...get investing money to pay old investors ...wouldn't that be a punzy scam thingy?

Nov 17 11:28 PM

[Nom De Plum:]

When you make a call like that you need to evaluate the cost to borrow the shares. At $30 I did a whole bunch of work on the company and thought it was a great risk/reward short as I believed that revenue expectations would only bet and not materialy exceeded for the next few years. However, beofre doing the work I should have inquired about the cost to borrow. There was 30%!!! interest charge on borrowing the shares. OPEN would need to hit $21 from $30 in less than a year before I even started making a penny of profit. I thought the company was worth around $18-20 so the short made no sense....and that's probably why the "borrow rate" was 30%

Nov 19 12:26 PM