Observations on OpenTable’s IPO

OpenTable, the elite restaurant reservation service linked to hundreds of local media and organizational Web sites such as Citysearch and Superpages.com, defied naysayers last Thursday with a successful IPO that ended its first day at $28.71, 44 percent above its $20 opening price.

In two days of subsequent trading, the price has come down to $26.72. But the price has been relatively stable and appears to reflect enthusiasm for a truly useful service by affluent stock investors/diners, and enthusiasm for an impressive first-mover company with multiple revenue streams (i.e., monthly fees tied to customer premise equipment and services, installation fees, and per-diner fees).

Kelsey’s Marketplaces program made a number of observations about the 292-person company in a full-scale report issued in March. Most importantly, we noted that the North American operations have become quite profitable. This doesn’t seem to be widely understood. Only the company’s aggressive expansion into key European and Asian markets has kept OpenTable at “break even.”

But there are plenty of danger signs around. The worldwide recession has had an immediate impact on high-end dining, which is OpenTable’s bread and butter (it primarily serves restaurants with average bills above $80). The company says it seats 2.8 million diners a month, but estimates that reservations are down 10 percent to 12 percent from last year. This potentially crimps an important revenue stream for the company, which receives an estimated $1 per diner.

Economy aside, the company’s long-term prospects are geared around making it churn-proof with value-added features. Extra value is provided by OpenTable to restaurants by diner feedback, leads and customer “dining cheques,” which are the equivalent of frequent flier awards. But a surprising number of these cheques have not been cashed in, making us wonder whether the suite of these features is really important, and/or a differentiator.

OpenTable also seeks to boost its customer base. This may also prove challenging. The company’s expensive proprietary system requires a dedicated sales force and is anchored by unique customer premise equipment. It remains to be seen whether the CPE-based approach will continue to dominate in an IT environment that’s generally going “open platform.”

Given all this, can OpenTable be a long-term success? It definitely can. Our assumption is that OpenTable, with cash in hand, could readily expand into mid-priced markets (i.e., $40 per check). It can do this by developing Net-based software or by acquiring a reservation-based system aimed at this market. We also believe the company could do well by expanding into targeted advertising.

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