OpenTable (NASDAQ:OPEN), which runs an online reservation system for restaurants, went public in the summer of 2009. Given the financial crisis and recession, it was a gutsy move. But investors clamored for the stock: On its first day of trading, the shares surged 72%.
Since then, OpenTable’s momentum has continued, reaching a high of $115 this week. For investors, it was supposed to be a no-brainer stock.
Maybe not — on Wednesday, OpenTable’s shares plunged nearly 15% after investors were disappointed with first-quarter results.
Is growth still strong? Will the company be able to recover? Here’s a look at the pros and cons:
Pros
Great business. OpenTable has an electronic reservation book, which is connected to opentable.com and mobile devices. The platform has a network of roughly 20,000 restaurants, which seat about 6.5 million diners every month. For this, OpenTable gets an installation fee and a recurring subscription. In other words, the revenue base is fairly predictable.
Marketing. Many Internet companies need to spend huge amounts on advertising, such as on search engines like Google (Nasdaq:GOOG). As for OpenTable, about 90%-95% of its traffic comes from organic sources like its customers’ websites. It is essentially free marketing.
New business. As OpenTable’s footprint grows, there are opportunities to add new offerings. For example, the company now has a Groupon-like daily deal program. These new extensions can be nice revenue generators.
Also, OpenTable has strong prospects for foreign markets. To this end, the company recently purchased U.K. firm Toptable.
Cons
Leadership. On the earnings announcement, OpenTable dropped a bombshell: The company’s CEO, Jeffrey Jordan, was leaving the company. No doubt, this is a huge concern for investors. Does Jordan think there are fewer opportunities at OpenTable? Interestingly enough, the buzz is that he will join a Silicon Valley venture capital firm.
Costs. Even though OpenTable has a cost-effective marketing channel, it looks like its other expenses are bulging. After all, it’s getting tougher to find top-notch programmers. Companies like Facebook and Zynga have the dollars and appeal to snag talent.
In fact, in the first quarter, OpenTable showed pressure on its operating margins, with operating expenses increasing by 55.4%
Saturation. Already, OpenTable is a dominant player in its industry. However, as its market share expands, the company is having more difficulties adding to its customer base. This is especially the case in the North American market.
Verdict
Even with the big drop in the stock price, OpenTable is still not cheap. The price-to-earnings ratio is 153 and the price-to-pretax earnings ratio is 106.
Investors will likely remain cautious for a while and see how the company performs. There’s also the disruption with the CEO departure.
With such negative factors and uncertainties, the cons outweigh the pros on OpenTable’s shares.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
