Investors currently shorting Opentable, Inc. (OPEN) may be taking a significant risk, either in terms of a short squeeze on good news from the battered company, or much more speculatively, a possible takeover. OPEN provides a real-time online restaurant reservation service for diners, as well as on-site reservation management tools to restaurants. The company fills approximately 8 million seats per month, with approximately 24,000 restaurant customers.
OPEN is currently heavily shorted by the market. Although the company's business model is flawed, its recent share price drop, combined with limited debt and a significant restaurant user customer base may make it an attractive takeover target for competitors. This risk increases as the price and market capitalization move lower. OPEN recently beat some fourth quarter estimates, and is showing revenue growth. Others on this site have suggested that the company's numbers may be the result of the company propping up its numbers by share buybacks. Still, it appears that the riskiness of shorting OPEN has increased substantially as the share price has dropped and revenue continues to grow.
OPEN's share price has cratered from a high of $118.66 on April 25, 2011 to a low of 31.54 on November 29, a decline of over 73%. OPEN encountered bad news in September when Google (GOOG) announced it was buying Zagat, leading to a further price decline. The price has rebounded since the low, with a recent closing price of $48.15 on 2/28. As noted previously, OPEN reported solid numbers for the fourth quarter, with revenue of $37.2 million, and an EPS of .37 cents. Sales growth increased by 29%, with revenue of $29.32 billion in 2010 rising to $37.86 billion in 2011. International revenue was $5.6 million. OPEN expanded into Europe in 2010 with the acquisition of Toptable.com for $55 million.
Technically, OPEN's chart is giving conflicting signals. The price may be testing the support of the lower level of an upward channel since the low on 11/29. Additionally, there appears to be longer-term resistance at approximately 52.5. The stock is trading below the 200 day SMA, but above the 50 day SMA, which may provide some support. Further, the 50 day SMA just crossed over the 100 SMA, which may be bullish. Daily volume appears to be trending downward after a post-earnings sell-off on 2/8. A short term bearish pennant may be forming after this sell-off. It is difficult to tell where OPEN's share price is headed at this point.
Still, the bears are betting that OPEN will fall further. Short interest as of 2/15 was 10.27 million shares with a float of 23.75 million. With an average daily volume of 2,081,816, it would take 4.9 days to cover the short interest. As such, it appears the stock is subject to a large risk of a short squeeze. Any good news for the company may lead to spikes in price with shorts scrambling to cover their positions. Even more troubling for investors, substantiated news of a possible takeover would seriously cripple the bearish investors in this stock.
The thesis upon which investors are basing their decision to short OPEN is sound. The fundamental structure of OPEN's business model limits its long-term opportunities for growth, especially considering the potential for competition from GOOG and other companies. The limited nature of OPEN's core market makes it difficult to identify significant growth prospects. Its customer base is only those restaurants which take reservations, while the vast majority of restaurants in the United States and abroad do not. Thus, OPEN has no services to provide to those restaurants which do not take reservations.
Further, restaurants have noted that OPEN's services are expensive, and are therefore subject to competition from competing services which are cheaper. In the restaurant business, where operating margins are slim, a more cost-effective alternative to OPEN would be welcomed. GOOG has hinted that it is developing a reservation system that would require no software installation for restaurants. Livebookings has recently introduced a free reservation service. Thus, OPEN is prey to losing significant market share from competitors.
GOOG appears well-positioned to lead this sector and gain market share, considering its significant resources. Zagat gave GOOG a much wider audience, including the majority of restaurants that do not take reservations. The future for online dining may be an integrated service that allows diners to both make reservations at an upscale eatery, and also order takeout from the local Chinese joint. Such an application would integrate reviews, menus, location and hours. GOOG has the capacity to develop such a product, while OPEN does not appear to be moving in this direction.
Thus, there appear to be two possible scenarios for the future of OPEN. The first is the company continues its attempts to expand in both the U.S. and foreign markets, leading to marginal increased revenue, while GOOG ultimately develops a free, competing online reservation system that requires no software. A competing reservation system from GOOG would render OPEN essentially meaningless. In this case, the bears would have called it right, and be able to cash out with a tidy profit.
The second scenario is that OPEN is acquired by GOOG or another company. There has been some recent unsubstantiated chatter of OPEN being a takeover target. With limited debt, and relationships with restaurants already in place, it is conceivable that a competitor may wish to acquire OPEN; the company could provide a significant customer base that would be tough for competitors to replicate.
OPEN was certainly not a takeover target when its market capitalization was around $2.5 billion this past summer. OPEN's current market capitalization of $1.05 billion still makes it pricey for a takeover. However, if the share price continues to drop further, it may be more attractive to competitors. Since OPEN is so heavily shorted, it may be subject to a risk of a short squeeze even on the mere news of a potential takeover. This is where the bears could be exposed to potential risk. Short sellers who got in this past summer at lofty valuations may be well advised to take profits and cut off any risk of exposure to a short squeeze.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.