OpenTable Inc (NASDAQ:OPEN) is up more than 77% over the past 12 months, as well as approximately 40% year to date. At the same time, the stock carries a hefty short position of 20%. Trading at 30 times forward earnings, some shorts might have taken their position based on valuation alone. Other shorts might have established their positions based on longer term concerns.
The good news
OpenTable Inc (NASDAQ:OPEN)’s revenue has consistently improved over the past three years, and profits have been delivered over the past four years. OpenTable Inc (NASDAQ:OPEN) was established back in 1998. Its ability to survive through difficult economic environments in the early 2000s and during The Great Recession of 2008/2009 is a positive sign.
Another positive sign is that OpenTable Inc (NASDAQ:OPEN) sports a healthy profit margin of 15.68%. This demonstrates quality efficiency, and it increases the odds of future growth. If margins falter, then there’s a good chance that CEO Matthew Roberts and other company leaders will be able to come up with cost-cutting solutions.
While it can’t be predicted what those cost-cutting measures would be, great leaders tend to have a knack for finding solutions to problems. And according to Glassdoor.com, employees have anonymously given Roberts an 89% approval rating. Employees definitely have confidence in their leader, and they seem to be confident in the direction of the company. The only negative that stood out throughout the reviews was dated technology, but OpenTable Inc (NASDAQ:OPEN) is already aiming to make improvements in this area, and it should be an easy fix, especially considering the company’s strong balance sheet.
Potenially bad news
Several analysts have pointed to OpenTable as already having a strong footprint in most markets throughout the United States, which would limit growth potential. However, Roberts recently stated in an interview with Jim Cramer on Mad Money that OpenTable only accounts for 15% of reservations in North America, which leaves an enormous opportunity for growth. Roberts also stated that OpenTable only accounted for 3% of reservations internationally. That being the case, this can’t be looked at as bad news unless you’re looking for a reason to be bearish.
A potentially real concern is a recent decline in online traffic. Please keep in mind that this doesn’t guarantee any trends. It’s simply used as a tool that might offer a small clue to the company’s near-future performance.
According to Alexa.com, over the past three months pageviews-per-user declined 6.22%, time-on-site dropped 7%, and searches (often indicates first-time users) fell 5%. These aren’t terrible numbers, but they don’t inspire confidence, either. TopTable.com, the U.K. version of the site, hasn’t fared any better, with pageviews-per-user plummeting 16.44% and time-on-site declining 8%.
Online traffic numbers might relate to seasonality, so it’s important not to get too caught up in them. A much larger concern is the health of the consumer.
As well all know, high-income consumers have done well over the past several years thanks to stock and real estate investments. Since the vast majority of restaurants that require reservations cater to high-income consumers, this has been a big boon for OpenTable.
Looking ahead, both stocks and real estate might perform well, but there is much debate about sustainability in each area due to the potential tapering of monetary stimulus and higher interest rates. If stocks and real estate aren’t capable of continued growth, then high-income consumers will take it on the chin, which will then lead those consumers to cutting their discretionary spending habits. One of the first areas they will cut is dining out. This, in turn, would negatively impact OpenTable.
Similar ideas
Though Yelp’s revenue has increased every year, losses are commonplace on an annual and quarterly basis. Additionally, Yelp owns a profit margin of -9.03%, and it’s trading at 219 times forward earnings, making it incredibly expensive. Does 1999 come to mind? Yelp is up more than 100% year to date, which is ludicrous. This would be an extremely high-risk investment.
Conclusion
OpenTable is enjoying strong momentum, and there is still upside potential, but broader economic concerns make it a risky play. Keep in mind that stocks and real estate won’t continue to appreciate forever; this has been proven time and time again. If high-income consumers see less discretionary income due to weaker performances in investments, it could negatively impact OpenTable Inc (NASDAQ:OPEN).
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends OpenTable and TripAdvisor. The Motley Fool owns shares of TripAdvisor. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article OpenTable Might Surprise You originally appeared on Fool.com is written by Dan Moskowitz.
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