Shares of the online reservation website OpenTable Inc. (NASDAQ:OPEN) have fallen 45% over the past 12 months, and 60% from their 52 week high. The stock has moved from nearly $90 per share in March of 2011, to their current price of $48.50. OPEN shares have fallen quite substantially over the past year despite beating earnings estimates in 3 of the 4 quarters and growing earnings and revenues by 50% and 41% respectively over the same time period.
2011 was a strong growth year for OpenTable as the number of restaurants listed on the website increased by 25% over the past year, and perhaps more importantly the number of seated diners rose almost 50% over the previous 52 weeks. The company is operating in a niche market where the competition is very low. For this reason the company has seen strong growth over the previous year in just about all aspects of its business. However there is just one drawback to an otherwise attractive growth company - its valuation.
OpenTable is trading at nearly 54 times current earnings and 30 times next year's earnings. On the surface, the price to earnings multiple makes the stock appear relatively overpriced. When we factor in the future growth rate and look at the PEG ratio of 1.89, this only confirms that the stock is trading at a rather high valuation. Though the PEG ratio is not overwhelmingly high, does very little to calm to concerns over the high price to earnings multiple. The stock's price to book and price to sales ratios also indicate that the stock may be overpriced. However this generally is the case with a high growth tech company and these two ratios are in-line with the rest of the industry.
Next year's earnings are expected to be around $1.56 per share- and increase of 75%. Therefore if the stock maintains its current valuation of trading at nearly 54 times earnings- than next year, OPEN would be looking at a share price of roughly $85 per share. While the stock has seen that price range before, growing earnings by 75% year over year is never and easy task. With such a high valuation, OPEN's growth rate needs to keep pace with the company's high price multiple. I just worry that eventual the company's growth will be unable to keep pace.
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
OpenTable is certainly a profitable company, which is evident in their strong margins. Though the company appears to have very strong margins, they are actually in-line with the majority of web based companies. For instance a gross profit margin of 72% would be impressive for a manufacturer or a retailer, but for a web based company with little overhead and a low cost of sales, this is just simply an average figure. Over the past year OpenTable has improved their operating margins as a result of reduced general and administrative expenses. The company's overall net income was negatively impacted in 2011 from a higher effective tax rate, increasing from 22% in 2010 to almost 34% in 2011. Overall the company has very efficient operations, which do help support the company's growth.
Overall I must say I do like the service that OpenTable provides- as it's fast, easy and convenient. However I'm not sure I would fall in love with the OpenTable stock as much as I do the actual company. This is mainly due to OPEN's high share price valuation which is trading at nearly 54 times their current underlying earnings. Fundamentally, I think the company is very profitable, but the street isn't looking for safe profitability here, it's looking for rapid growth. While I do feel the company will continue growing, I'm not convinced that it will continue growing both earnings and revenues at the pace it has been setting. My feeling is that although OpenTable's growth and profitability look attractive, its high valuation does create a large amount of downside risk. I think OpenTable could certainly be a winning trade, but its valuation is still too high to be considered a safe long term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.