OpenTable Inc (OPEN): Should You Reserve a Place in Your Portfolio for This Stock?

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OpenTable Inc (NASDAQ:OPEN), a provider of online and computerized restaurant reservation services, helps restaurants and diners transition from traditional phone reservation methods to online and mobile alternatives.

OpenTable Inc (NASDAQ:OPEN)OpenTable’s solutions solve real problems

Traditional restaurant reservations, a combination of phone and voicemail reservations and manual record keeping on paper, are inefficient for a few reasons.

Firstly, although searching for restaurant information on the Internet through company websites, blogs and message boards is pretty common, customers are typically unable to complete the restaurant booking process online for most restaurants. Furthermore, phone operators do not work for 24 hours a day and voicemails are one-directional exchanges with no value-add.

Secondly, bookings and individual guest preferences are either recorded in hard-copy reservation books or stored in the brains of individual staff. The loss of the handwritten records and the departure of employees typically create problems for restaurant operators.

Last but not least, there is nothing that is as desired as choice in the minds of consumers. Having to call all the targeted restaurants individually to check for the availability of tables puts a damper on customers’ plans even before the first dish is served. Similar to travel plans, consumers are looking for a destination website to meet all of their restaurant-booking needs.

OpenTable Inc (NASDAQ:OPEN) solved restaurant operators’ problems by providing services such as websites and mobile apps offering customers access to table availability data and its proprietary Electronic Reservation Book (“ERB”) solution, comprising software which is installed on a touchscreen computer system. According to the 2010 edition of the Deloitte & Touche Restaurant Industry Operations report, only 35% of restaurant operators’ costs are variable, suggesting that additional customers delivered through OpenTable’s platform and services add significantly to the bottom line through operating leverage.

Network effect beneficiary with strong recurring revenue

The market leader or first mover whose brand is synonymous with the products or services in question usually leverages its market position to grow even more rapidly, effectively keeping new entrants out of the market. As OpenTable expands its network, an increasing number of diners will be attracted to the wider variety of dining options through its websites and mobile apps; while more restaurants will be happy to join OpenTable’s network to reach out to a larger base of customers.

Using North America as an example, OpenTable’s customers are paying an one-time ERB installation fee that averages from $200 to $700, with a monthly subscription fee of $199. OpenTable Inc (NASDAQ:OPEN) also enjoys additional upside through a variable performance fee charged per diner seated through its online and mobile reservation platform. The results speak for themselves: OpenTable grew its revenue in every year since 2006.

Growth drivers

OpenTable still has significant growth prospects, both domestically and internationally. Management guided for U.S. and international revenue to grow by 21% and 58%, respectively, based on the lower end of its estimates for full-year fiscal 2013.

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