OpenTable is Leaving Money on the Table by Not Pushing Ads Harder


OpenTable ( OPEN ) is leaving some money on the table. We assume that it is well aware of the advertising potential it has and so is clearly holding off for some reason. So far, the company has focused on consolidating its position as the leading provider of free and real-time online restaurant reservations in North America and it is implementing its business model successfully in other countries. It is also comfortably ahead of its competitors like Urbanspoon, owned by IAC/InterActiveCorp ( IACI ) and UK-based companies liveRES Ltd and Livebookings Ltd. It seems to have hit the right note with its decision to take Groupon head-on by selling third-party restaurants coupons through its website; however for such a popular site, why are it's ad revenues are so small?

We currently have a price estimate of $94.90 for OpenTable stock , just under 10% ahead of the market price.

Low contribution of ad revenues

Revenues from advertising activities contributed just about half a million dollars to the company's top-line in 2008. These figures reached almost $2 million in 2009, and then doubled to just below $4 million in 2010.

Most of these revenues are due to the significantly higher fees per diner that OpenTable charges for reservations done at restaurants through promotional listings. OpenTable currently charges restaurants $7.50 for each diner making a booking due to a promotional listing of the restaurant - much higher than the $1 per diner for normal reservations through the website. OpenTable facilitates promotional listings by categorizing restaurants into groups like "1000-point Restaurants" which attracts diners by offering them bonus Dinner points which they can redeem to get Dining Checks.

… but bigger revenue opportunities remain untapped

While promotional listings will continue to rope in profits for OpenTable, the company has only recently ventured into third-party advertisements on its website. This will no doubt bring in additional revenues with little attached costs.

But the biggest revenue opportunity for the company rests in the diner database they have created over the years, and continue to add to. The database contains dining-related information volunteered by its registered users, besides their geographical location and contact information, and can be used by OpenTable to send targeted advertisements to diners, which are potential customers for a particular restaurant. OpenTable could gain handsomely from this business, and its decision not to try this so far, could point to a conscious decisions to avoid sharing this information or using targeted ads that might scare off users.

These opportunities, if they could be tapped in the years to come, helps us estimate annual advertising revenues in excess of $20 million at the end of 5 years.

See our full analysis for OpenTable

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: IACI , OPEN



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