Description

Thesis

Although a good Company, OpenTable is a vastly overvalued stock, trading at 70.7x and 47.5x 2010E and 2011E EPS, respectively.  Further, on December 21, 2009, the "lock up" period expires on 12.2 million shares.  The fully diluted share count of the company is 24.2 million and the free float is 8.39 million shares, so if these shareholders sell it will increase the free float about 2.5x.  This will be an enormous amount of stock for the market to absorb.  The combination of an excessive valuation and a very strong, near term downward catalyst make OpenTable an attractive, event-driven short opportunity.  According to Bloomberg, the current short interest on the stock is 280,000 shares, or 3% of the float, so it should be borrowable.

Company Description

OpenTable is a provider of an online restaurant reservation system.  The Company went public in May 2009.  The Company's Electronic Reservation Book, or ERB, combines proprietary software and computer hardware that computerizes restaurant host-stand operations and replaces traditional pen-and-paper reservation books.  By using the Company's website, www.opentable.com, diners can find, choose and book tables at restaurants on the OpenTable network in real time, overcoming the inefficiencies associated with the traditional process of reserving by phone.  The online reservation service is free to diners.  As of June 30, 2009, the OpenTable network included approximately 11,000 OpenTable restaurant customers spanning all 50 states as well as select markets outside of the United States.

The Company's business model is very straightforward.  The Company generates revenues from restaurants in three ways:

• Restaurants pay a one-time installation fee for onsite installation and training
• Restaurants pay a monthly subscription fee for the use of the Company's software and hardware
• Restaurants pay a fee for each restaurant guest seated through online reservations.

For the quarter ending June 30, 2009, subscription revenues accounted for 53% of total revenues, reservation revenues accounted for 42%, and installation accounted for 5% of revenues.

Current Valuation Analysis

OpenTable is a vastly overvalued stock.  Here are the multiples the Company is trading at based on the mean sell-side estimates for EBITDA and EPS:

For comparison, Google (GOOG) trades at 11.4x 2010E EBITDA and 19.7x 2010E EPS.

Fundamental Analysis

One of the reasons the stock is trading at such high multiples is that the market seems to believe that the growth potential of the Company is enormous.  This belief is unfounded as the target market for OpenTable is actually much smaller.  The following fundamental analysis will demonstrate why OpenTable's end market isn't nearly as large as the investment community seems to think that it is.

OpenTable actually does a great job in laying out all the metrics one needs to analyze the business.  Below I've included a table of relevant metrics of Installed Restaurants, Seated Diners, and Revenues by Type.  All these figures can be found on Pg. 50 of the Company's secondary offering prospectus dated September 22, 2009.

From these, one can derive how to project the business going forward:

Subscription Per Installed Restaurant

Subscription Revenues for the quarter / Installed base

Reservation Revenues per Seated Diners

Reservation Revenues / Seated Diners

Installation Revenues per Net Restaurant Add

Take the end of quarter restaurant installed base and "back out" the "net adds" per quarter.  Then, divide the installation revenues by this net add number.

Seated Diners Per Installed Restaurant

Number of customers that were seated through OpenTable per quarter / installed restaurant base for the quarter.

It appears that OpenTable charges about $790 per quarter, or about $3,160 per year (ballpark) for the subscription to their reservation system.  For the actual charge per customer seated through their reservation system, it appears they charge $0.68 per customer (ballpark).  And for the installation fees, it appears they charge a one-time fee of about $1,000 to install their software and hardware at the restaurant (ballpark).  I'm sure if one calls up the Company and claims to be from a restaurant and would like more information on pricing, one could get the exact figures, but these are pretty close.  As far as the Seated Diners per Installed Restaurant, it appears that OpenTable seats around 900 customers per quarter or about 3,600 customers annually (ballpark) through each of their installed restaurants.

So, from these metrics, we can get a decent estimate of how large the actual market opportunity there is for OpenTable.

On Pg. 57 of the Company's secondary offering prospectus dated September 22, 2009, the Company states that there are approximately 30,000 reservation-taking restaurants in North America.  Let's take that as a given and also assume that there are another 30,000 restaurants in Europe and Asia that also take reservations.  I'm not sure what the actual number is, but given the large proliferation of restaurants across the US in particular as opposed to other parts of the world, this seems like a reasonable estimate to start from.

Based on the Company's current run rate of seating 3,600 customers annually through each of its installed base of restaurants, this equates to 3,600 x 60,000, or 216,000,000 million people seated annually through OpenTable.  True, this number could increase if customer adoption of OpenTable's reservation system goes up, but the Company's been around since 1998.  We should be well into the adoption curve.  Also of note, even in the bull market of 2007, the number was about the same, so it's not as if these run rate numbers are a product of the downturn in the economy.

So, for now, let's assume the Company sometime in the future has 100% of the installed base of reservation restaurants (60,000, full market share) and drives the same amount of customers per restaurant annually as it currently does (3,600).

Assuming the same pricing for subscriptions, the Company would generate 60,000 x $3,160 per year, or $189.6 million in subscription revenues.  Also, the Company would generate 216,000,000 seated customers x $0.68, or $146.9 million in reservation revenues.  With a fully installed base, installation revenues would be minimal (the only represent 5% of revenues currently, anyway).  So, the total revenue generation capacity would be approximately $189.6 mm + $146.9 million, or about $336.5 million annually.

The Enterprise Value of the Company right now is $603.3 million, so it's trading at 1.8x times the total size of its entire target market!  Even assuming reasonable growth figures for the price of subscriptions as well as charges per customer seated, you're still not getting to revenue figures that justify the current valuation.

Let's do a "sanity check".  Based on sell-side consensus estimates for 2010, EBITDA margins for YHOO, EXPE, and PCLN (well established, very seasoned internet businesses), are projected to be 37%, 27% and 21%, respectively.  That's an average EBITDA margin of 28%.  Let's say that OpenTable's achieves these same margins, 1200bps higher than its current margins of 16%.  This equates to $336.5 million x 28%, or $94 million in future EBITDA.  With the Company having an enterprise value of $603.3mm, right now you're paying 6.4x for theoretical EBITDA sometime in the very distant future (at which point the business will be fully mature and not be growing at all).  This appears pricey, particularly given that business will face risks going forward.

As a further "sanity check", assuming minimal depreciation, interest expense/income, etc. and a tax rate of 39%, this equates to net income of $94 million x (1- 39%) = $57 million in net income.  There are currently 24.2 million fully diluted shares outstanding, equating to an EPS of $2.35.  Applying a "mature business" PE multiple of 12x on this, equates to a stock price of $28, right around where it's currently trading.  Again, this appears pricey, particularly given that business will face risks going forward.

Let's do one more "sanity check".  Take a look at the Citigroup initiation report on the stock, dated June 28, 2009.  In this report, the analyst projects for 2011 a total restaurant installed base of 17,555 (NA and International) and net income of $11.1 million.  These numbers are pretty close to my own projections, so I'm comfortable with them (yes, I always do my own homework and I don't rely on the sell-side - I've just decided to do this analysis to show that other people have numbers similar to my own, so my argument isn't only based on "my" opinion).  So, if an installed base of 17,555 restaurants generates $11.1 million in net income, its reasonable to think that 60,000 restaurants will generate (60,000/17,555) * $11.1mm = $38 million in net income.  If you assume some operating leverage (ie, higher margins), one gets up to the $57 million in net income that I calculated above ($2.35 in EPS).  So, the numbers seem to "foot" relatively nicely.  This provides more conviction to the numbers.

So, that's the upside for the stock.  $2.35 in EPS x a mature multiple of 12x = $28.  That's where it's trading now.

Now, let's look at the downside.  The mean sell-side estimates for the company is $0.58 in 2011.  Again, by my own projections this looks reasonable.  Even placing a 30x multiple on this 2011 EPS generates a share price of $17.40.  That's over 35% down from current levels!  So, even with an aggressive multiple, the stock is still expensive.

Based on the above analyses, the upside in the stock appears very limited while the downside appears substantial.  This presents an attractive risk/reward profile.

Catalyst

On Pg. 108 of the Company's secondary offering prospectus dated September 22, 2009, it's stated that the "lock up" period on 12.2 million shares expires 90 days from the date of the prospectus.  This is December 21, 2009.  Given that the largest shareholder is a VC firm (Benchmark), it's very likely that they are going to either (i) liquidate their holdings and give the proceeds to their LP's or (ii) give the shares to their LP's and let them sell them on the open market.  Either way, a lot of stock should hit the market.  With a free float of 8.39 million shares, these 12.2 million shares hitting the market will increase the float by 2.5x.  This is a lot of stock for the market to absorb and should significantly depress the market price of the stock.