) is at the top of its game. As the leading provider of free
and real-time online restaurant reservations, the company is
comfortably ahead of its competitors like Urbanspoon, owned by
) and UK-based companies liveRES Ltd and Livebookings Ltd. It also
seems to have hit the right note with its decision to take Groupon
head-on by selling third-party restaurants coupons through its
While the company has repeatedly surpassed investors' high
expectations, maintaining this trend is going to get a bit more
expensive. OpenTable's focus on markets outside North America is
the most logical course of action for the long run. But this also
means that the company will need to spend significantly in the
years to come - before the strategy of geographical diversification
can generate much upside.
We currently maintain a $94.90 price estimate for
, at a premium of roughly 5% to market price.
OpenTable has already seen a significant increase in its
The expenses incurred by OpenTable are reported under the
categories of technology, operations, & support, sales &
marketing, and general & administrative. Since the technology
and operations & support costs are direct expenses for the
company, we have included this as a part of the company's gross
profit margin in our analysis, while the other two cost components
have been combined as sales, general & administrative
OpenTable's direct and indirect expenses increased by only 10%
in 2009, although revenues shot up by 25%. This is a fitting trend
for companies operating in the internet industry. In 2010, after
the acquisition of toptable.com, top-line revenues grew by 40%,
accompanied by a larger-than-expected 25% increase in expenses.
… but we think this could continue in the years to
We believe that while toptable.com did contribute to a bulk of
the increase in expenses - more particularly the indirect expenses
- an important factor was a disproportionate increase in sales
& marketing expenses.
OpenTable's marketing model relies on a direct sales force of
regional account executives and sales representatives as well as a
team of inside sales representatives. With increasing competition
on OpenTable's home turf from newer players - notably Urbanspoon -
marketing spend has shot up as part of an effort to retain existing
Also, the company's moves into newer markets will require
expenditures to establish a sizable workforce at each
location. On top of that, in order to capture the growth
opportunity from offering third-party coupons (similar to Groupon's
business model), OpenTable will need to allocate a notable portion
of its workforce to this product segment.
The increase in marketing expenses is captured in our forecast
for SG&A expense as a percentage of gross profit.
SG&A costs have declined in the recent past, dropping below
70% of gross profit in 2010. We forecast that this value will
continue its decline, to about 57% of gross profit in 2011, and
settle around 42% by the end of our forecast period. However, if
our forecasts prove aggressive, and SG&A expenses as a
percentage of gross profit hit 64% in 2011 and only 50% by the end
of our forecast period, it would imply 10% downside to our
$94.90 price estimate for OpenTable
. This would put our number just above $85.
See our full analysis and $94.90 price estimate for