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Google Inc (GOOG), Facebook Inc (FB): OpenTable Inc (OPEN) Could Rise Above It All

Shares of online restaurant reservation service OpenTable Inc (NASDAQ:OPEN) have been on fire since the beginning of May, after the San Francisco, California-based company reported first quarter earnings that topped analyst expectations.

OpenTable IncDue to its categorization as a social media stock, OpenTable is often mentioned in the same breath as Yelp Inc (NYSE:YELP) and Groupon Inc (NASDAQ:GRPN). Yet I believe that OpenTable is a superior investment to either of these companies, since it is better equipped to survive a rapidly changing mobile market that is increasingly dominated by Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB).

While bears suggest that OpenTable’s trailing P/E of 62 and its year-to-date price surge of 80% indicate that a bubble is forming, I believe that this growth stock still has room to run. Let’s break down the company’s primary facts and figures.

For its first quarter, OpenTable Inc (NASDAQ:OPEN) reported non-GAAP adjusted earnings of $0.45 per share, up 13% from the prior year quarter and topping the consensus estimate by two cents. GAAP-adjusted earnings surged 43% year-on-year to $0.30 per share.

OpenTable’s top line rose 16% to $45.5 million, also beating expectations. The majority of its revenue, $39.4 million, was generated in North America, while the rest came from overseas markets in Europe, Asia, Latin America and Dubai. Seated diners in North America increased 24% year-on-year to 34.3 million, while seated diners in international markets climbed 37% to 3.1 million. CEO Matt Roberts stated that a third of its North America reservations originated from its mobile apps.

During the quarter, OpenTable Inc (NASDAQ:OPEN)’s margins increased across the board.

1Q 2012 1Q 2013
Gross Margin 73.3% 75.0%
Operating Margin 18.8% 21.8%
Net Profit Margin 12.2% 15.7%

Source: 1Q Earnings Report, Yahoo Finance

All these margin improvements suggest that the company is operating at peak efficiency, and points to stronger profit growth in the coming year. In addition, the company’s free cash flow and cash reserves are growing at healthy rates, while it still has no long-term debt.

OpenTable Inc (NASDAQ:OPENwas founded in 1998, and it started operating in 1999 with a limited selection of San Francisco restaurants. The service was later expanded to more than 25,000 restaurants across most of the United States, and several international cities. While the service is free for end users, the company charges restaurants monthly and per-reservation fees for a listing and access to its system.

More importantly, OpenTable Inc (NASDAQ:OPEN) offers restaurants online services such as reservations, table management, and POS (point of sale) integration which allows restaurants to keep track of the average check per table. It also offers restaurants detailed analytics that allow restaurants to streamline their online and brick-and-mortar operations. Restaurants that use the system completely replace their paper reservation systems with OpenTable’s ERB (Electronic Reservation Book) system.

OpenTable also offers a rewards program, which allows end users to collect points that can be redeemed at participating restaurants. To reach a wider range of end users, OpenTable has a popular mobile app that is available on iOS, Android, Windows and BlackBerry devices.

OpenTable’s site also features user reviews of its listed restaurants, which puts it in indirect competition against local business review site Yelp. OpenTable Inc (NASDAQ:OPEN) is also indirectly competing with Google and Facebook, which have both been expanding into localized review services.

Yelp, which generates revenue through display advertising, is younger than OpenTable and far less profitable. During its first quarter, Yelp remained in the red with a net loss of $0.08 per share, while revenue soared 68% to $46.1 million. Although Yelp boasts over 102 million monthly unique users, the company is trying to weed out fake reviews, and to defend itself against accusations that it extorted local businesses into purchasing display ads in exchange for removing unfavorable reviews.

When compared to OpenTable, Yelp’s foundations are far less secure. OpenTable has an established, focused reputation as the largest online restaurant reservation site in America, while Yelp is a sprawling all-in-one search site for local businesses.

OpenTable’s premium service is a valuable tool that restaurants can use to track all aspects of its business. Yelp, on the other hand, simply sells display ads. OpenTable Inc (NASDAQ:OPEN)’s business model is difficult for even Google to duplicate, and its partnered restaurants would be reluctant to hop on board with unproven competing services.

By comparison, Yelp’s localized review service and display ads business model can easily be copied by either Google or Facebook, both of which now offer location-based review services. Google’s service is integrated into Google Maps, while Facebook allows users to search for local businesses reviewed by friends, as opposed to strangers.

In 2011, Google realized that OpenTable Inc (NASDAQ:OPEN) was evolving into a major threat, so it purchased popular dining ratings authority Zagat. That purchase canceled out Yelp’s amateur reviews with professional ones, but only had a limited impact on OpenTable, since it still didn’t give Google a viable online reservations system to work with.

While Google Android users can search for local restaurants via Google Maps, read the Zagat review (if available), and then directly make a phone reservation, that process pales in comparison to OpenTable’s seamless one-click reservations from its mobile appRegardingFacebook, it’s the same story. Facebook’s location-based reviews can link to phone reservations, but not online ones. Therefore, OpenTable is considerably well-protected from future disruptive threats from either of these companies, while Yelp could become completely irrelevant.

To further neutralize Facebook’s threat, OpenTable Inc (NASDAQ:OPEN) released a Facebook app earlier this year that allows users to share their dining histories across an interactive map. OpenTable also recently acquired popular food discover app Foodspotting for $10 million, which allows users to share and search for pictures of specific dishes. While Foodspotting will remain an independent app, Opentable is incorporating the app’s meal recommendation and sharing features into its mobile app to offer a more visual and social experience.

People flock to Facebook since that’s where all their friends are. They use Google because it consistently produces the highest-quality search results. In that same way, people are using OpenTable Inc (NASDAQ:OPEN) because it offers the widest selection of reviewed restaurants with one-click reservations.

OpenTable’s business model benefits both restaurants and end users, and is a difficult one to completely replicate. Therefore, with a strengthening mobile base, it will continue to hold its ground against other challengers, and eventually the only way to compete with OpenTable may be to acquire it. This could be a distinct possibility, since Google, Yahoo and Facebook all have much to gain from integrating OpenTable’s customer base.

The article OpenTable Could Rise Above It All originally appeared on and is written by Leo Sun.

Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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