Time to Short OpenTable, Again?

"There’s a crack in everything.  That’s how the light gets in." -Leonard Cohen

OpenTable  (OPEN) reports this week so I thought I'd take a quick look at the name to see whether there is an opportunity here. As every bombed out 2011 stock has rallied furiously in January, I have been keeping a close eye on the names I think are most likely to continue to disappoint when it comes to meeting growth expectations for the remainder of the year.

OpenTable is near the top of this list. The stock has only rallied 63% off its Nov 29 low of $32. I say only, because that's pretty much the standard move for the Web 2.0 dogs this past January.

The whole thing reminds me of a mini version of the January 2001 rally in the Nasdaq. For those that don't remember that move, the Nasdaq went from 2200 to 2800 in the blink of an eye. I remember it vividly because I was buying Sycamore Networks (SCMR), JDS Uniphase (JDSU), Corning (GLW), Nortel, PMC-Sierra (PMCS), Siebel Systems, Cisco (CSCO), and RIM (RIMM) like they were going out of style.

At the time I thought I was a genius as it seemed all I had to do was load up on everything that was hammered in 2000 and I'd be up at least 100% before January was through. Too bad that didn't happen. What doubled in January was break-even by the middle of February and then down at least 50% by the end of March. 

This move is not anywhere close to an identical repeat of that as the demand destruction in IT spending that followed then was epic, but the nature of the anticipation rally and indiscriminate buying that preceded the awful fundamentals that followed are very similar.

So, let's take a look at OpenTable again….



Looking at these numbers you should be able to pick up a few things:

1) Revenue in North America is virtually flat over the last 9 months despite a 10% increase in the restaurant base

2) International expansion has continued to be a slow going work-in- progress

3) The first real attempt at generating ancillary daily-deal revenue didn't work out

4) Stock based compensation continues to be a very significant expense

Obviously the North American revenues are what I would focus on the most. Current estimates are for 24% revenue growth in 2012. If North America does not pick up, I doubt international will get them there so the top line estimates look vulnerable. And if you look closely at these numbers you can conclude that pricing is eroding as 1700 new restaurants have only led to an incremental revenue increase of 300k USD over six months.

This is not a surprise as OpenTable's product, Openconnect's growth is far outstripping the ERB, but it also appears ERB discounting is being used to fend off competition. Either way, these metrics are bad news for a stock trading at 66x reported earnings and 40x non-GAAP earnings.  Add in that they are phasing out Spotlight and are still behind schedule on their Europe transition, and you wonder whether or not the street is still too bullish for even this coming quarter.

Based on my own estimates Q4 should be a slight top line miss as better seasonality masks some of the slowing growth. However, with the stock trading back to 20% above where it was ahead of Q3 earnings I think a quarterly disappointment becomes a material risk to the share price. Personally I favor taking a position with the intent of sandwiching Q4 and Q1 2012 numbers as I don't think the Q1 numbers are reachable, but I wouldn't rule out a small Q4 spike. And if you are not looking to trade volatility I think you just treat this as a 20% targeted return investment and size it accordingly.

As far as intangibles go, I would point out that competition in North America is clearly becoming an issue as Eveve, Rezbook, and now Freebookings are going after OpenTable customers. What Google (GOOG) will do with Zagat/punchd remains a big question as they remain a potential OpenTable suitor. Any signs of Google ramping their own solution would be worth paying attention to.

I also think the future of Yelp and it's impending IPO is worth keeping an eye on.  Though I will say longer term I expect OpenTable to be the last man standing in the dining space even if that means in a less profitable form.

This has more to do with the fact that I see way too many startups in this space folding than it does with OpenTable's execution. Just consider that in San Francisco we have a new startup called Seatme.com launching with 13 employees. Amazing isn't it that there are still VC's out there willing to fund a 23yr old Duke Grad's 'idea' to simply improve upon the OpenTable model when all the evidence points to just how difficult executing the OpenTable model has been despite huge penetration and more lucrative pricing. Only in the valley…..