- Fundamental Analysis: Is a Rich “Dot-Com” Valuation Justified?
- Technical Analysis: Moonshot or Parabolic Blowoff Top?
|Company||Ticker||Price Earnings Ratio|
One reason for the “dot.com valuation”of OpenTable is the perception that OpenTable is in the early stages of growth in a huge untapped market.
ADDRESSABLE MARKET SATURATION IN 2012?
Follow through this analysis and you'll begin to see the harsh reality. Even though there are about 960,000 restaurant establishments in the US, OpenTable’s addressable market is primarily limited to the “White-Tablecloth Restaurants” – mostly high-end restaurants and those that take reservations.
And of the restaurants that take reservations, not all of them have the technology setup to pipe online reservation info to their staff in charge of “greeting & seating” incoming diners at the entrance to the restaurant.
-And the company's installed restaurant base as of December 31, 2010, totaled 13,795, a 27% increase over December 31, 2009
|Year||Installed Restaurant Base|
This is entirely reasonable given that most early-adopters are already using OpenTable and the low-hanging fruit has probably already been picked. Additionally, a survey of 125-150 independent restaurants by Brad Safalow of PAA Research indicated that most have little interest in routing their reservations through OpenTable’s ERB system.
As you can see from the foregoing projection of market saturation (see table above), OpenTable’s installed base growth could hit a brick wall in about mid-2012. Literally. Their niche market will be saturated.
On Monday, hotel stocks were down on Marriot's (NYSE: MAR) dismal room revenue growth warning and restaurant stocks were down as well.
Finally, note the company has cautioned about growth rates possibly slowing as we go forward. In the last earnings report, OpenTable did not give earnings & revenue guidance for Q1 and indicated that Q1 would not have as favorable year-over-year growth comparisons.
ANALYST OPTIMISM BLYTHELY OVERLOOKS SATURATION & COMPETITION.
Whenever an analyst has to stretch earnings projections out farther than the front year, one has to wonder what they think about the current year’s prospects, not 4 years in the future.
Citicorp analysts seem to be hanging their bets on the notion that OpenTable can successfully transition into Groupon's local deals market with OpenTable's "Spotlight" service. But the real question is if Groupon will be moving into the reservations business too and compete with OpenTable. With the muscle of Groupon's 70 million subscribers and a purportedly $15-25 Billion IPO forthcoming to raise capital, Groupon is in a strong position to give OpenTable a run for the money. Full restaurant reservations would be a natural fit for Groupon.
"GROUPON NOW" - Starting to Invade OpenTable's Turf
In fact, Groupon's new innovative "Groupon Now" service -- which helps restaurants fill empty-tables with flash realtime deal offerings -- is a heartbeat away from OpenTable's reservation model. The realtime connection with the restaurants are already in place, so all they need to do is add full reservation capability for normal, non-discounted reservations. More info here.
The investment banker running the forthcoming IPO for Groupon would be prudent to advise Groupon to announce plans for a complete restaurant reservation offering before the IPO to generate a buzz for the stock (and higher IPO pricing for Groupon).
As one can imagine, such an announcement from Groupon would be devastating to shares of OpenTable.
In the end, Groupon may very well become "the Google of the Deals & Reservations Niche" and OpenTable could become just another "Yahoo, Altavista, Lycos, or Inktomi."
There's no denying OpenTable's year-over-year earnings growth metrics have been fantastic. But then again, when you’re starting from very small numbers, it’s easy to show a huge growth rate: ($14M 2010 Net Income ) / ($5M 2009 Net Income) = 180% growth rate.
The recent headline earnings growth rate seems to be the only fundamental most investors and mutual funds focus on without regard to more difficult comparisons in the quarters ahead and inevitable market saturation. Going forward, the year-over-year growth comparisons won’t be as easy because the year-ago 2010 quarterly earnings are bigger numbers to compare against than the 2009 numbers.
Well, OpenTable went public in 2009 (NASDAQ: OPEN) and as of September 30, 2010 it was priced at more than $1.5 billion. That translates to more than $100,000 for each contract it holds with the approximately 14,000 restaurants listed on OpenTable.com. Sadly, many small neighborhood restaurants may themselves not be worth as much as the value that has been placed on their future business with OpenTable.
TWITTER offers a smartphone app called Tweservation.
The NRA has reportedly denied "developing" a competing system:
Per your inquiry, we are always looking for opportunities to better serve our members and help them streamline their operations, reduce costs and increase customer satisfaction. The National Restaurant Association is not currently exploring the development of a proprietary online reservation system, but is evaluating the needs of our members in this space, including all options currently on the market.
But just because the organization claims to be "not developing" as system of its own, doesn’t preclude it from striking a partnership with other lower-cost reservation providers to help improve member restaurant profitability. Nor does it preclude it from "leveling the playing field" in the online-reservations business by providing member restaurant data to all online reservation companies equally and at a cost much lower than that offered by OpenTable.
Think of it: Because the NRA is an advocate for all of its member restaurants, the NRA has every reason to try to bring down the current high cost-per-diner seated via OpenTable.
Consider the fact that you are buying the company’s $14 million per year of earnings, but the company costs $2,390,000,00 ($2.39 Billion market capitalization). What is your earnings yield for your investment?
It’s 0.00000058%. That’s a tiny fraction of a safe CD yield -- and a CD would be without the potential downside of losing your cash you’ve invested in the OpenTable's shares should the company’s valuations return back to earth.
Thus we have: Stock Price = (Growth Rate) X (Earnings).
With OpenTable's trailing 12-month earnings of $0.85/share, we would have (38 growth rate) X ($0.85) = $32.30/share.
So in conventional equity valuation analysis, based on OpenTable's and growth rate, $32.30 per share would be a "fair" valuation. Given that the stock is trading at $104/share, it's almost embarrassing to present this analysis, but that is realistically how analysts should value the stock. The difference between the $32.30 calculated fair valuation of OpenTable's shares and the current $104 price can be attributed to speculation and pure sentiment alone.
FUNDAMENTAL ANALYSIS SUMMARY: If OpenTable did indeed have an addressable market of 900,000 restaurants in a niche that had high barriers to entry and there was no competition in tandem with a rapid client uptake rate, then, yes, perhaps a price earnings valuation of 179 might be acceptable.
But there are low barriers to entry for setting up a restaurant reservation website and the addressable market is only 30,000 in the US. Due to competition and the relatively high cost of the service, OpenTable may experience difficulty absorbing all 30,000 restaurants into the installed base.
The company may be nearing saturation point in its "addressable market" of reservation-friendly restaurants perhaps in mid-2012, after which point signing up new restaurants will be harder and harder and growth will slow.
Finally, calculations presented based on earnings and growth rate indicate a fair value solely based on fundamentals for the stock would be $32.30. Of course, market sentiment and short squeeze rallies may explain the apparent excess in current valuations over fair valuation. Sentiment and short squeezes are quite ephemeral. Company fundamentals are not.
Some pundits are saying short-covering accounts for much of the "buying" and others say it may simply be "window-dressing" by fund managers for the March quarter end. In any case, when these two types of "buying" dry up, stocks usually fall on their own weight in subsequent days. So to play the "window-dressing" phenomenon, one would initiate a short position or buy puts in the last few days of March as this artificial action may have lifted the stock to a great short entry point.
Often, when shorts are squeezed out of a stock on a parabolic rise, the stock implodes as the available supply of short-buy-to-cover demand for shares vanishes and there are few longs buying at nosebleed prices after such a runup. It remains to be seen whether this will be an "Exhaustion Gap Blowoff Top," but the OpenTable chart is beginning to look primed for an Exhaustion Gap trade.
Here's a chart example of an Exhaustion Gap:
Sidoti's Cakmak has a neutral rating. He says he doubts the extent of OpenTable's growth prospects in smaller U.S. cities. Reservations aren't as necessary to dine out in less dense cities, he says, compared with such places as New York, Chicago, or Los Angeles, where OpenTable is a strong presence.
His main concern, however, is the company's expensive valuation.
Even such a pricey stock can generate returns, Cakmak says, but only if it grows very quickly. "Given the lofty expectations of sell-side [analysts] and investors, we see little room for error," he says.
- OpenTable’s poor growth potential in small cities
- High valuation (Price Earnings ratio)
- Little room for error.
Then on Monday, James Cramer was again pounding the table for OpenTable, but Cramer's stock picking record is not something to write home about. A 2007 Barron's review found the only way to profit from Cramer's stock recommendations was to short them.
Some wise market participants often state that a Cramer endorsement is "the kiss of death" for a stock because his gesticulations often come at the top of a rise and then he offers scant apologies to the folks who bought on his word only to find they bought at or near the top.
The foregoing explains the common adage on the Street that if you do the OPPOSITE of what analysts tell you, you’ll make money. This reeks of one of those times.
Thus it makes sense for longs to take profits on OpenTable after its recent run-up and wait for a consolidation at lower prices if you are still inclined to invest in the company against most classic fundamental and technical analysis common sense.
For shorts, short-covering and window-dressing may have provided an excellent entry point above $100. Never a dull moment.
Disclosure: I am short OPEN.
Additional disclosure: Disclaimer: The author makes no warrant for the accuracy of the content herein other than the links provided to traditional online sources of information for verification purposes. Additionally, investors shall not take any comments stated herein as advice to buy or sell any equities and if investors do so, they acknowledge that they have done their own proper due diligence and proceed at their own risk.