OpenTable (NASDAQ:OPEN) is attracting short-sellers like rotten meat attracts flies. Should you join them?

OpenTable lets people make restaurant reservations online and charges the restaurants a one-time installation fee for on-site installation and training, a monthly subscription fee for the use of its software and hardware and a fee for each restaurant guest seated through online reservations. In March, 20,000 restaurants used its services — as did 7.5 million diners a month.

OpenTable has put in a great performance since going public two years ago. From its May 2009 IPO price of $28.48 a share it rose as high as $116 last month before tumbling to its current $93. In the past 12 months, it generated $111 million in revenue up 44% and $15.6 million in net income, a 184% spike.

But some investors think that OpenTable is overvalued. To bet that a stock will drop, investors can sell its shares short. To do that, they borrow the shares from a broker who sells them at the market price and puts the proceeds of the sale into an escrow account. If the shares later drop below the price that you sold them, investors can go out into the market and buy back the borrowed shares at a lower price, repay the share loan, and pocket the difference between the original price and the price at which they bought back the shares.

If the price of the stock goes up after the broker sells the shares, investors must put up more cash fast to cover their losses or take their losses immediately by buying the shares in the open market immediately and repaying the broker. It is what happens if a short bet goes bad that makes it very important for an investor to be right before taking the risk.

The level of short interest in OpenTable has more than tripled since April 2010. Back then 1.7 million shares of the company had been sold short, representing 14.9% of the then-average daily volume (its short-interest ratio).

OpenTable’s short interest rose as high as 5.7 million shares, in mid-April, but by the end of the month short interest fell to 5 million shares, for a short-interest ratio of 3.9%. This suggests some investors are getting nervous about this trade or have taken all the profits that they need.

Why have investors expected the stock to drop? Its price-to-earnings ratio of 145 is about 9 times higher than the market average P/E. And in my observations of the market, if a company with a high P/E does not beat analysts’ earnings expectations and raise its guidance each quarter, investors will decimate its stock price.

But OpenTable is not giving much to investors hoping to profit from its decline. In the first quarter of 2011, OpenTable reported adjusted earnings of 28 cents a share, five cents above estimates. Net income rose 68% to $4.2 million. And revenue leaped 59% to $33.7 million just beating analysts’ $33.6 million forecast.  

Of course, there was just one little problem – in its earnings announcement, OpenTable also said it replaced its CEO with its CFO. Investors pushed the stock down 7.6% on the news.

But perhaps there also was some concern about the growth of expenses at OpenTable. For example, its operating expenses spiked 56% to $27.2 million — primarily due to a 50% increase in its headcount following its Toptable.com acquisition.

I would advise only selling short a stock that has a better-than-50% chance of going bankrupt. Otherwise, investors are taking the risk that their bet on a price drop is right in the long run but wrong in the next three months. And given the market’s requirement that short-sellers cover their bad bets by buying shares, a short bet combined with better-than-expected earnings can cause the price to rise quickly due to a so-called short squeeze, in which panic buying forces more short sellers to buy.

Since OpenTable’s earnings are expected to rise 68% to $1.57 a share in 2012, its price-to-earnings-to-growth (PEG) ratio is a very expensive 2.13. On the other hand, OpenTable has no long-term debt so it is in no danger of going bankrupt. Its cash rose 30% in the first quarter from the previous three months.

OpenTable is an expensive stock but the risks of selling its stock short outweigh the upside.

Peter Cohan has no financial interest in the securities mentioned.