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Serious Reservations About Open Table Valuation
If you're an investor in one of Benchmark Capital's venture funds, you probably make all your dinner reservations through Open Table (Nasdaq:OPEN), the online reservation service that went public May 21, 2009. It's convenient, and more importantly, it has put a lot of bread on your table.
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Up 60% in its first day of trading and another 53% since, Benchmark paid approximately $21 million for the 5.3 million shares it held at the time of Open Table's IPO. Today, those shares would be worth $259 million if they still held all of them. However, between May 2009 and the end of February 2010, Benchmark sold 1.5 million shares. Still, we're talking conservatively about a $200 million gain, all thanks to an incredibly overheated stock.
At the time of the IPO, I had reservations about the valuation and more so now. To illustrate my concern, here are four companies you can buy for the same billion-dollar price tag as Open Table.
Open Table vs. Four Other Companies
Weyco Group
The Milwaukee-based company makes Florsheim and Nunn Bush men's shoes. Its history dates back to 1892. Today, the Florsheim family owns 36% of the company and is firmly in control of the business.
You won't mistake it for a growth company. Annual revenues from 2003 to 2009 have been in a narrow range between $216 million and $233 million. However, book value per share grew 70% over those seven years with only two years of negative total returns in the bunch. With a 2.5% dividend yield, most of this has come through capital appreciation. It's just a solid little company.
Diamond Management & Technology
The only business services company of the four, Diamond provides management consulting services to some of the world's largest businesses through its six offices including four in the U.S. and London and Mumbai. Fiscal 2010 revenues were $210 million with operating profits of $15.7 million. Its first quarter ended June 30 was impressive.
CEO Adam Gutstein said, "Demand for our services remains healthy across each of our industry verticals and we anticipate continued revenue and earnings growth for the remainder of fiscal 2011."
Net revenues, free cash flow, EBITDA and every other financial measure were up both year-over-year and sequentially. It is projecting net revenues will increase 21% to 24%. If you can handle the volatility in this stock, it's up 40% year-to-date and 80% last year. Momentum is on its side.
Ambassadors Group
This is a company that believes in education. Its three subsidiaries provide students and adults with learning opportunities through travel and information. It'll never be a huge company, but it does a good job serving a niche market. Its top line in the last five years got as high as $114.5 million in 2007 and as low as $69.3 million in 2005. In terms of net income during these years, it's never been less than $18.5 million. That'll likely change in 2010 as its net income is down $4 million at the end of the second quarter. People just aren't traveling as much, nor are parents spending as much on their kids.
As of July 19, net enrolled participants are down 23%. Full-year net income will likely be around $12 million or $0.62 a share, which means its current forward P/E is 18.9. That's a little higher than its historical norm. Wait for it to drop under $11 and then you'll have a good deal.
Hawkins Inc.
Back in September 2009, the company's stock was trading at $23.92 with a price-to-sales ratio of 0.88. Today, it's trading at $33.00 and a P/S of 1.31. While its first-quarter report saw net income rise 20% year-over-year, its CEO warned (just as he did back in 2009) that profits would return to historical norms due to stabilizing commodity prices and increasing competitive pricing pressures. That'll slow earnings growth but it's still a great business. Most importantly, employees own 15% of the stock and are its largest shareholder.
The Bottom Line
Are you still not convinced? Try this on for size. Lululemon (Nasdaq:LULU), a stock I consider extremely overvalued, trades at a price-to-sales ratio of 5.6 with an enterprise value 20.4 times its EBITDA. Open Table's P/S is 15.1 with an enterprise value 57.9 times EBITDA. You don't have to be the owner of a four-star restaurant to know it's expensive. (Learn more about IPOs in The Murky Waters Of The IPO Market.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
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Up 60% in its first day of trading and another 53% since, Benchmark paid approximately $21 million for the 5.3 million shares it held at the time of Open Table's IPO. Today, those shares would be worth $259 million if they still held all of them. However, between May 2009 and the end of February 2010, Benchmark sold 1.5 million shares. Still, we're talking conservatively about a $200 million gain, all thanks to an incredibly overheated stock.
At the time of the IPO, I had reservations about the valuation and more so now. To illustrate my concern, here are four companies you can buy for the same billion-dollar price tag as Open Table.
Open Table vs. Four Other Companies
|
Company |
Market Cap |
EBITDA (TTM) |
Market Cap/EBITDA |
|
Open Table (Nasdaq:OPEN) |
$1.11B |
$16.4M |
67.7 |
|
Weyco Group (Nasdaq:WEYS) |
$276.79M |
$23.4M |
11.8 |
|
Diamond Mgt. & Technology (Nasdaq:DTPI) |
$275.60M |
$17.3M |
15.9 |
|
Ambassadors Group (Nasdaq:EPAX) |
$221.61M |
$25.3M |
8.8 |
|
Hawkins (Nasdaq:HWKN) |
$339.31M |
$47.5M |
7.1 |
Weyco Group
The Milwaukee-based company makes Florsheim and Nunn Bush men's shoes. Its history dates back to 1892. Today, the Florsheim family owns 36% of the company and is firmly in control of the business.
You won't mistake it for a growth company. Annual revenues from 2003 to 2009 have been in a narrow range between $216 million and $233 million. However, book value per share grew 70% over those seven years with only two years of negative total returns in the bunch. With a 2.5% dividend yield, most of this has come through capital appreciation. It's just a solid little company.
The only business services company of the four, Diamond provides management consulting services to some of the world's largest businesses through its six offices including four in the U.S. and London and Mumbai. Fiscal 2010 revenues were $210 million with operating profits of $15.7 million. Its first quarter ended June 30 was impressive.
CEO Adam Gutstein said, "Demand for our services remains healthy across each of our industry verticals and we anticipate continued revenue and earnings growth for the remainder of fiscal 2011."
Net revenues, free cash flow, EBITDA and every other financial measure were up both year-over-year and sequentially. It is projecting net revenues will increase 21% to 24%. If you can handle the volatility in this stock, it's up 40% year-to-date and 80% last year. Momentum is on its side.
Ambassadors Group
This is a company that believes in education. Its three subsidiaries provide students and adults with learning opportunities through travel and information. It'll never be a huge company, but it does a good job serving a niche market. Its top line in the last five years got as high as $114.5 million in 2007 and as low as $69.3 million in 2005. In terms of net income during these years, it's never been less than $18.5 million. That'll likely change in 2010 as its net income is down $4 million at the end of the second quarter. People just aren't traveling as much, nor are parents spending as much on their kids.
As of July 19, net enrolled participants are down 23%. Full-year net income will likely be around $12 million or $0.62 a share, which means its current forward P/E is 18.9. That's a little higher than its historical norm. Wait for it to drop under $11 and then you'll have a good deal.
Hawkins Inc.
Back in September 2009, the company's stock was trading at $23.92 with a price-to-sales ratio of 0.88. Today, it's trading at $33.00 and a P/S of 1.31. While its first-quarter report saw net income rise 20% year-over-year, its CEO warned (just as he did back in 2009) that profits would return to historical norms due to stabilizing commodity prices and increasing competitive pricing pressures. That'll slow earnings growth but it's still a great business. Most importantly, employees own 15% of the stock and are its largest shareholder.
The Bottom Line
Are you still not convinced? Try this on for size. Lululemon (Nasdaq:LULU), a stock I consider extremely overvalued, trades at a price-to-sales ratio of 5.6 with an enterprise value 20.4 times its EBITDA. Open Table's P/S is 15.1 with an enterprise value 57.9 times EBITDA. You don't have to be the owner of a four-star restaurant to know it's expensive. (Learn more about IPOs in The Murky Waters Of The IPO Market.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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