Well, there you have it. Another clear business model short comes to fruition.
Looking at Opentable's key North American metrics:
- Subscription revenue up 1.5% sequentially
- Reservation revenue down sequentially
- Installation/other revenue down sequentially
- Absolute attrition was up; management is blaming that on the economy
- Meanwhile, the installed restaurant base was up 4%
- Spotlight revenue down again, and the product will now be phased out
- Average revenue per seated diner down sequentially by 1c and expected to decline further
Now what does all this tell you?
It tells me OpenTable's US business has hit a wall. A sequential decline in revenue that can't really be attributed to competitive pressures is a major cause for concern for a company like Opentable. It's a sign that they are operating in an already very well-penetrated market, and thus lacking the type of future growth prospects they have been promising investors. Add in the looming competitive threats, and you will understand why this stock is behaving the way it is.
What I don't get is why the analysts covering the name have been so out to lunch on this. I listened to to the entire conference call, and i don't think a single analyst asked the management team any questions about freebookings.com or what Google may be up to with Punched and Zagat down the road. Plenty of housekeeping questions about the tax rate, why it abandoned Spotlight (it was failure from day one), and when international will get going. But then again, what can you expect from analysts whose price targets have done nothing but chase the share price. Unlike netflix, there have been no noted bears in this name. Instead we get works of art like this:
OPEN)%3B+Reducing+2012+Estimates+and+Price+Target/6904215.html" rel="nofollow">Collins Stewart maintains a 'Buy' on OpenTable; price target lowered from $104 to $93. Collins' analyst says:
We are reducing our 4Q11/2012 revenues by 8% and PF EPS estimates by 13%-23% to reflect phasing out of Spotlight revenues and continued weakness in North America reservations volume and pricing. Our price target of $93 is based on 40x 2013 PF EPS of $2.33 or 1.0x PEG on forward 2 year earnings growth of 40%. While OPEN remains a solid long-term buy and inexpensive at 0.6x/0.4x PEG on 2012/2013 EPS, in the short term we are awaiting proof that the company can deliver strong revenue growth under new management and in a slow economic recovery, esp. in a seasonally strong quarter like 4Q or 1Q.
Are these guys serious? The stock is 70% below your price target and you are tweaking your estimate. And 40x 2013 pf estimates, what planet are these guys on? Assuming Opentable was to get to that profitability on this model -- and that is a HUGE assumption -- what do you think the growth rate will look like by then? I'd be betting it would collapse. We'd be looking at a company that would be flat to down, at best, from an EPS growth standpoint going forward, which means I'd want to be paying single-digit multiples by that point. Yet, this analyst is making this case for a company that just had a negative sequential quarter in it's North American segment, which accounts for 85% of its business. That, my friends, is just bad analysis.
40x trailing is expensive for any stock without amazing growth prospects, and its a downright insult for a stock where the revenue model going forward is in jeopardy and competition is heating up. 40x two-year forward projections after 40% eps growth for two years is called living in lala land. Benjamin Graham is not rolling in his grave on this one; he's actually rising from the dead to hunt this analyst down. Why not just write: "Price Target $93, based on the assumption that some bigger fool named Groupon or Google buys them out"?
I was once a bull on this stock. I believed it'd turn into the marketing platform that Andrew Mason keeps telling us Groupon will be one day. I also once believed RIM (RIMM) was cheap at $70 and that its management team was on top of their game. At some point, the facts change, and you adjust. For the last six months I have been hammering away on OpenTable, and for the last six months, that has been the right call. Would be nice to see some of these guys do the same, instead of wasting our time with research reports that are tantamount to toilet paper.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.