Weak Economy Weighs on OpenTable’s Growth & Stock Upside

OpenTable (NASDAQ:OPEN) announced its Q3 2011 figures last week and while the online restaurant-reservation company increased its North American restaurant customer base from 15,560 to 16,237 over the quarter, it actually showed a decline in its net income for the period by more than 35%. ^[1] While the company’s operating costs continue to grow briskly, the weak economic environment has clearly led to lower consumer spending which would explain the reduction in the number of diners using OpenTable’s online reservation system. The announced results confirm the short-term concerns about OpenTable’s business we expressed in our article OpenTable Q3 Earnings Next Week: What We’re Chewing On.

In light of the economic slowdown, we have updated our price estimate for OpenTable’s stock from $84 to $65, which is still about 50% above the current market price. The more than 20% reduction in our price estimate can largely be attributed to:

1) An increase in our estimates for OpenTable’s SG&A expenses over our forecast period. The company’s strategy of increasing international presence has already demonstrated faster growth in costs – largely marketing expenses – than revenues.
2) A decrease in our estimates for number of diners per restaurant, triggered by the expected decrease in consumer spending over the next few quarters.

See our full analysis for OpenTable here

OpenTable’s Number of Diners Seated Dipped for the First Time

OpenTable seated about 23.6 million diners over the last quarter, which is a small reduction from the 23.8 million diners it seated in Q2 2011.

While the number of diners seated by OpenTable at restaurants in the U.K., Germany and Japan increased marginally from 1.6 million to 1.8 million diners, the mood across North America during the period is captured by the fact that the number of diners seated in North American restaurants for the quarter decreased from 22.2 million to 21.8 million. This is the first time OpenTable has seen a decrease in the number of diners it seated in its North American stronghold.

And Costs Continue to Rise

OpenTable’s expenses continue to grow rapidly with the company spending more in both the saturating North American market as well as the recently entered international markets.

There has been a marked increase in the company’s selling, general & administrative (SG&A) expenses over the period. While sales & marketing expenses rose from $6.4 million to $7.5 million in this quarter, the general & administrative costs jumped up by nearly 50% – from $5.1 million in Q2 to $7.4 million in Q3. While we recognize that a rapidly growing company must spend in order to sustain its growth, if OpenTable’s increased SG&A spend keeps outpacing revenue growth then margins are going to take a serious hit.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. OpenTable, Inc. Announces Third Quarter Financial Results [↩]