Why OpenTable’s 7% Decline Was Unwarranted

Shares of OpenTable (NASDAQ:OPEN) slid 7% over trading on Tuesday, May 14, when investors reacted quite sharply to news that the popular rating and review website Yelp (NYSE:YELP) has launched the Yelp Reservations service. ^[1] Yelp Reservations allows restaurants who manage their own listings on the Yelp website to accept reservations from potential diners for free, and is basically a stripped down version of Yelp SeatMe – the online reservation system it acquired last July. ^[2]

OpenTable has its fair share of competitors providing similar online reservation and seating management services including Livebookings, UReserve and Eveve, and Yelp’s SeatMe offering is already a formidable opponent given Yelp’s strong online presence. Additionally, TripAdvisor announced its foray into the restaurant reservation business last week with its acquisition of lafourchette, which boasts 12,000 restaurant partners across Europe. ((TripAdvisor Signs Exclusive Offer To Acquire lafourchette, TripAdvisor News Releases, May 6 2014)) Yelp’s decision to provide a free-to-use reservation service to restaurants clearly shook investors’ confidence in OpenTable’s position in the industry.

While we agree that with Yelp Reservation can potentially drive more business for Yelp SeatMe and eat into OpenTable’s market share in the long run, we believe that investors overestimated the impact of the launch on the company’s share price.

We maintain our $70 price estimate for OpenTable’s stock, which is about 10% higher than the current market price.

See our complete analysis for OpenTable

OpenTable is the undisputed leader in the industry, with the company enlisting nearly 50% of all full-service reservation-taking restaurants in North America as its customers. All these restaurants use OpenTable’s core Electronic Reservation Book (ERB) system, which is the company’s main subscription revenue driver, and is also responsible for a majority of its diner reservations. OpenTable also caters to the reservation needs of walk-in restaurants that also accept reservations through its pay-as-you-go OpenTable Connect offering.

Now, to understand the impact of Yelp’s increasing push in the restaurant reservation industry on OpenTable, it is important to first identify Yelp’s target audience. Yelp SeatMe offers services which are similar to OpenTable Connect at a flat $99-a-month usage fee with no additional charges per diner – making the ideal customer for the service primarily walk-in restaurants who would otherwise consider OpenTable Connect as their reservation system. On the other hand, the free to use Yelp Reservations offers minimal services to restaurants and diners, limited to making reservations on the Yelp website, notifying diners of their bookings, and providing restaurants with a simple list of reservations for a day. After all, Yelp’s motive behind the new free service is to get more restaurants to take ownership of their Yelp page and then to make money through the advertising potential that is subsequently unlocked.

There is, therefore, nothing stopping a restaurant from opting for Yelp Reservations irrespective of which reservation system it already uses – OpenTable, Yelp SeatMe or any other similar offering. Also, Yelp will continue to partner with OpenTable for the time being to allow restaurants which are customers of the latter to book tables on the OpenTable system directly. So the only real downside the move offers to OpenTable is that restaurants that have yet to adopt a reservation system and start using the Yelp service in the near future are more likely to adopt Yelp SeatMe over OpenTable’s offerings. But given the low penetration of online reservation services among restaurants in the country, this isn’t going to materially affect growth rates for OpenTable in the near future.

The primary risk factor that does need to be considered for the long-run is the possibility that Yelp could stop supporting OpenTable reservations on its website. While currently a slim possibility, it could happen if Yelp gains considerable ground in the industry. However, even these circumstances do not present a sizable downside to OpenTable’s share value. This is because Yelp is just one of about 600 partners – including the likes of Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), Facebook (NASDAQ:FB) and Zagat – all of which together bring in between 5-10% of the total diners that make a reservation on OpenTable in North America. ^[3]

So to understand the worst case scenario impact of Yelp’s decision to stop partnering with OpenTable, assume that Yelp currently brings in 5% of all of OpenTable’s North American diners. While this is currently an exaggeration, this assumption will help us identify the potential loss in value for OpenTable better. Adjusting the number of North American diners per restaurant to a figure 5% lower over coming years in the chart below, you will see that OpenTable’s estimated share price declines from $70 to $68 – a mere 3% decline in the worst case scenario. Clearly, the market exaggerated the impact of Yelp Reservations on OpenTable by shaving 7% off the company’s value in response.

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1. Yelp Reservations: New Free Tool for Businesses Gives Diners Even More Options When Booking Online, Yelp Blog, May 15 2014 [↩]
2. Yelp To Acquire SeatMe, Yelp News Release, Jul 18 2013 [↩]
3. OpenTable Corporate Presentation, OpenTable Website, May 1 2014 [↩]