Everyone justifiably cheered when OpenTable (OPEN) went public yesterday. In a horrific economy, with wreckage as far as the eye can see, the debut of a real business with a 60% stock pop brought back memories of a happier era.
Unfortunately, those memories included companies that were overvalued by the end of their first day’s trading, sometimes wildly so (don’t I know it). And at yesterday’s closing price, OpenTable has joined that club.
OpenTable is a real business: A steady grower with a clear value proposition, a profitable US business, and plenty of room for growth. It’s growing 20%+ in a crappy economy, which bodes well for a cyclical recovery. But unfortunately the stock is already trading at 50X+ 2010 earnings, which leaves little room for disappointment or error.
ThinkEquity, one of the underwriters, is reportedly estimating OpenTable EPS of about 25 cents in 2010. Let’s assume that estimate is wildly conservative (underwriter analysts usually set the bar low, so IPO companies can “surprise” on the upside). Let’s assume that, in fact, OpenTable will earn at least 50 cents a share in 2010. Then it’s trading at 65X 2010 earnings.
And, so as not to take ThinkEquity’s word for it, let’s make our own projections.
Here are OpenTable’s recent financials:
Years Ended December 31, Three Months Ended
2006 2007 2008 2008 2009
Additional Financial Data:
$ 26,654 $ 39,601 $ 53,065 $ 12,667 $ 15,189 International
514 1,547 2,779 596 806 Total
$ 27,168 $ 41,148 $ 55,844 $ 13,263 $ 15,995 Income (loss) from operations:
$ 3,106 $ 4,974 $ 9,088 $ 2,409 $ 2,326 International
(3,157 ) (5,830 ) (8,462 ) (2,068 ) (1,494 )
What can we learn from this?
- OpenTable’s revenue is currently growing about 20% a year
- The US business (more mature) has an operating profit margin of 16%
OpenTable stock already looks expensive, so our risk is being too conservative about its growth prospects. So let’s optimistically assume that OpenTable can accelerate revenue growth to 30% a year for the next couple of years. And let’s assume that the US business continues to get more profitable and the international business eventually becomes profitable, so the company’s combined operating margin in a couple of years is 15%. What will the company earn?
2009 Revenue (+30%): $70 million
2010 Revenue (+30%): $90 million
2011 Revenue (+30%): $120 million
2010 Operating Income (10% margin): $9 million
2011 Operating Income (15% margin): $18 million
2010 Net Income (40% tax): $5 million
2011 Net Income (40% tax): $11 million
The company currently has about 20 million shares outstanding. Let’s assume some dilution from options, acquisitions, etc., and use a fully diluted share count of 22 million. Here’s the optimistic fully taxed EPS forecast for 2010 and 2011:
2010: $0.25 (approx)
The Bottom Line
At yesterday’s closing price of $32, OpenTable is trading at 65X the 2011 optimistic EPS estimate. In this market, with the slightest stumble, it could trade at 20X and be fairly priced. So that’s immediate 70% downside.