Short Idea: OpenTable Inc. (OPEN)

22 Responses to Short Idea: OpenTable Inc. (OPEN)

  1. How about timing? Do you think the best way to play this via a regular short position or LEAP puts?

    • If your investment horizon is finite LEAP puts are good. If you’re willing to hold as long as necessary I would go pure short.

  2. That’s your whole thesis — that it’s overvalued? Are you actually shorting this or just throwing the idea out there?

    • Not just that is overvalued – that even if they can achieve 100% penetration in all worldwide reservation-taking restaurants – the company warrants only half the price.

  3. A big part of the bull argument that you didn’t address is the potential of Spotlight. Presumably OpenTable is in an even better position than Groupon to deliver these sorts of deals, since it has data on reservations, excess capacity, etc.

  4. I argue that they do have barriers to entry, at least in USA. You need to look at every local market to discover that they have high market share in most markets. This gives them scale advantage in a relatively high fixed cost business over any competitor, of which there are none/few. on top of which, there are network effects that bring diners and restaurants together on their website. Their scale, along with this customer captivity gives them a competitive advantage over a competitor. Furthermore, if they can achieve full market penetration of 580mm revenue, at a 20% EBIT margin (conservative considering how scalable the model is) they would be trading at 10x operating earnings. I’m not saying its cheap, but it isnt completely ridiculous as you point out in your powerpoint. trading at “2x market size” is inconsequential. This happens all the time with high margin businesses

  5. I very much liked your “sanity checks.” Are we back in 1999? Did we not learn anything? Let’s looks at it from a common sense perspective. Do you really need to know all the academic hogwash of cost-of-capital..blah, blah, blah.

    Think like someone who would actually put up money to purchase the ENTIRE business. So, the entire business is currently “on the market” for $1.44B (yes, that’s a billion) or $63 per share as of today. If I’m deciding where to put my hard earned money to work, first I would ask what kind of return I would get with the risk free rate (US treasuries). In this case, let’s take the 5 yr. (we’re looking at 1.25%).

    The current pre-tax earnings yield on OPEN (taking the last consecutive 4Q’s of earnings at ~$14.7 M) is (14,700,000/1,400,000,000) = 1.05%. Does that sound good to you? Doesn’t to me, but sometimes I feel like I live on Mars when I discuss stocks with traders or the mathematically inept.

    If I required that my purchase give me an IMMEDIATE return in yr. 1, OPEN would have to deliver ~$140M in pre-tax earnings. Now, if you want to argue the growth story go right ahead, but just realize that in order to go from $14M to $140M in five yrs. would require a compounded growth rate of roughly 58%. Can it be done? Sure, anything is possible. I wouldn’t bet on it at these prices though. Also, with the prices attached to the Jan. 2013 -$45 Puts, doesn’t look like the options traders think so either.

    Personally, I would use Puts to execute the short. Also, because I use a hurdle of 15% for investments I wouldn’t pay more than $4 per share for this stock. I never pay for growth so the math is as follows: current pre-tax earnings of $14M/.15 = ~$93M. $93M/22.86M shares = $4.08/share. This may seem simplistic, and it will dramatically lower your investment universe at any given time, but it will also save you from losing your money.

    Thanks for the post.

  6. Great analysis. I haven’t looked into this in detail but at a first glance, the 945,000 # of world restaurants x 7% = 66,150 restaurants that take reservations
    Compared to the ~35,000 value you gave

  7. I just wanted to point out that I sometimes see investors losing sight of the forest from an intense focus on the trees. Another way to look at OPEN may be the following:

    Investor has $1.4 B burning a hole in his/her pocket. What to do? For simplicity’s sake, let’s assume that you can pick up any company on any exchange for it’s listed price today without having to pay a premium to take control of the company. Let’s go shopping.

    For $1.4B I can get the following. 100% of OPEN or:

    100% of Neutral Tandem for $481 M – At the current rate, this will give me about $37M in FCF/year.
    AND
    100% of WD-40 for $614 M – which will net me about $50-55 in FCF
    AND
    3.7 M shares of Berkshire class B shares – ($305 M/80.55)

    OR
    I could almost buy both Fair Isaac & Nutrisystem.

    OR
    I could buy all of Tootsie Roll

    OR
    I could buy the Brink’s Company & then take a vacation.

    OR
    I could buy all of Crawford & Co., Imperial Sugar, Steinway, Lithia Motors, AND WD-40.

    I’ll stop here but you get my point. If it looks like a short & smells like a short…

  8. VH –
    doesn’t this analysis ignore the potential for OPEN to increase its share of each restaurant’s bookings? ie, your total market size was computed based on constant bookings in MORE restaurants – but it’s possible that in 10 years everyone books their rezzies online through OPEN. (said again, a restaurant that currently seats 10% of its diners through OPEN will seat 80% of its diners through OPEN). I highly doubt that’s the case, but I think it’s an important part of the analysis that you ignored.

    -KD

    disclosure: no OPEN position, although I tried to short it in the $30s after the IPO but couldn’t get a borrow (phew!)

    • Hi Kid, you are absolutely correct. Although at that point I believe more competitors will come into the market, so the market would be more fragmented.

  9. HLYS is irrelevant.
    I would not overlook the power of revenue from people making reservations. They have been focused on signing up restaurants. Now they focus on getting people to use it. Their promotions are actually quite compelling.
    Timing with shorts is the most important, given the asynchronous risk/reward. Get the timing right by figuring out when they miss consensus.
    This may be a short, but its a question of when. Valuation shorts are, ultimately, not worth the risk.

  10. Nice presentation. I have considered shorting OPEN a couple of times but have never pulled the trigger. My general rule of thumb is not to short rapidly growing profitable companies no matter how overvalued. I have occasionally broken that rule, but only when it seems impossible for them to grow into their valuation in 4 or 5 years even if everything goes right.

    The question for me has always been whether they can increase the number of reservations they get from each restaurant. If my math is right, their current run rate is about 12 seated diners per restaurant per day. If you assume 2.5 people per reservation, they are only getting about 5 reservations per day per restaurant. Seated diners per restaurant has increased over the last 2 years but only by about 10%.

    I agree that it is not possible for them to ever justify their valuation just by growing the number of restaurants. But, if they could also significantly increase the number of reservations they get per restaurant, it is possible that they could eventually grow into their valuation.

    What are your thoughts on their ability to increase the number of reservations they get per restaurant?

    • Zimmer, I think an increase in the number of reservation per restaurant is feasible. However, my sense is that the market will be more fragmented in the future due to entrants such as UrbanSpoon, etc. So even when the # of reservations made online could icnrease, the share for OpenTable will likely be lower 10 years from now.

  11. Insiders are selling, however with positive cashflow this could drag out for a long while. There is acquisition risk with a dumb CEO buying it out for ‘strategic’ reasons.

  12. Great analysis!
    As Said by others, shorting is about timing . There is no doubt that the stock is not worth more than $30 or so, but there is also no doubt (at least to me) that OPEN is going to beat EPS expectations today. Thus, i think patience is still required (at lest a Q or two).

    That said, I missed something in your calcs:
    For exapmle the average Installation Revenue Per Restaurant Add is $1353 multiply by 130,000 restaurants gives $175M not $91M that you wrote. What am i missing here?

    Thanks
    Ron

  13. Great pitch, I pitched a short in this name around $35 (ouch). But we are forgetting that there is already a 35+% short interest in the name. This could be a problem.

  14. Robert Jackson, Augusta GA

    This is not a good write-up. It fails to recognize the significant barriers to entry and assumes there is no optional value of a restaurant media company having rolled up a highly fragmented industry and attracted a substantial audience of diners. I wrote up a similar short thesis shortly after the IPO but I have now refuted it and taken a long position since August with a $105 price target which is 40X my 2011 EPS target. I have deep industry perspective on the company and would be glad to share my model and write up which is too long to post here. Email me at

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