A Look Under The OpenTable

| About: OpenTable, Inc. (OPEN)

OpenTable (OPEN) was a darling of momentum investors up to 6 months ago when it hit a high of 118. Since then the high flying "growth stock" burned its wings and fell from the sky, all the way down to 31.

The reason? Well, the growth is really not there with revenue flat at 34 Million dollars for each of the last 3 quarters. And to make matters worse earnings per share are rapidly declining. On top of that OpenTable's service is relatively expensive and has no significant barriers to competition, which is attacking from different sides.

In a previous article I have already argued that OpenTable still enjoys a bubble valuation at current levels. My point is that a company with non growing revenue and declining profits is simply not worth 7 times the sales or 45 times projected earnings. Those ratios typically belong to companies that boast above-average growth. Companies that show no growth and decreasing profits are mostly valued below revenue. Following that reasoning OpenTable would not be worth more than 7 dollars. The question is therefore not why OpenTable sank from 118 to 35 but rather why it rose to 118?

In that article I also highlighted some shenanigans concerning the latest earnings report, emphasizing NON GAAP earnings over GAAP earnings, thereby obscuring the fact that true EPS declined from 27 cents to 17 cents in the last quarter:

Actual EPS was just $ 0.17, but OpenTable now also reports, for the first time, NON GAAP EPS, which is $ 0.30, allowing them to imply that EPS was "in line" with the estimated EPS of $ 0.30. And to my astonishment the media take this over. It is a LIE!

However, I find that OpenTable's latest trick to prop up its stock price is of a severer nature. The company just announced a 50 Million USD share buyback:

On November 30, 2011, OpenTable, Inc. (the "Company") issued a press release announcing that its board of directors has approved a $50 million share repurchase program. Any share repurchases made pursuant to the program will be made from time to time in the open market, in privately negotiated transactions or otherwise, in accordance with applicable securities laws and regulations. The timing and amount of any shares repurchases will be determined by the Company's management based on its evaluation of market conditions, the trading price of the stock, regulatory requirements and other factors. The share repurchase program may be suspended, modified or discontinued at any time at the Company's discretion without prior notice.

Now that is really credible. You have got to ask yourself: Why bring out such a press release anyway, for another reason than to prep up the stock? Why not just buy the shares back without making a fuss? Why does the outside world need to know about it? From an investor point of view it is an utterly stupid use of cash for a so-called "growth stock." Does it make the stalling company grow again? Of course not! If it would actually do it, it just drains the cash. That cash would be better spent on sales or acquisitions. On growth! In fact this is a non spoken admission that it sees no way of growing ahead. Besides, where does it get 50 million USD if it doesn't even have it on the balance sheet?

Note also that the "repurchase" is in no way binding. The company can quit whenever it wants, can decide not to buy back any shares at all (which is probably exactly what it will do).

Moreover, all insiders have been selling their shares and stock options without exception. The chairman of the board, Jeffrey Jordan, sold 26,500 shares as recently as november 15, at a price of $37.81. And now management wants to buy back shares? I can't believe investors were buying this story. Nevertheless, the stock soared 25% on the news from the 52-week low of 31.54 USD to 40 USD. Or actually I should say before the news! This implies, very questionably, that some people were cognizant of the news before it was released. The stock price has been falling back to the mid thirties now, but Jeffrey Jordan sold 10,000 more shares on December 5, at 40 USD. That was the height of the pop. Now that was AFTER the share buyback announcement! So right before and after the news he sold for a total of 1.4 million USD. Some buyback, isn't it?

I feel sorry for the people who bought on the pop of the "buyback" news.

I ask myself: Is this legal? Can management of a listed company really get away with announcing a share buyback program, but sell instead on the rise that such a press release brings about?

I can hardly say it better than a colleague on the Yahoo message board:

Still trading at nearly 6.5X sales. Growth has slowed. Competition coming and margins will be squeezed. Mgmt selling every chance they get and resorting to gimmicks like the share buy back to boost the share price.

It's obvious that OPEN can't afford to spend $50 million to buy back their stock. Even if they could afford it... what a strange way for a company focused on "growth" to spend money. A share buy back does nothing to grow the customer base, or retain existing customers. It doesn't improve their product or service. It doesn't enhance their competitive position one iota.

OPEN is still overvalued. Probably headed for the mid $20s or even lower within the next few months.

Disclosure: I am short OPEN.