OpenTable Overvalued With or Without Merger Rumors

OpenTable, Inc. (NASDAQ: OPEN) has traded higher on Monday due to rumors that Yahoo! Inc. (NASDAQ: YHOO) is interested in taking over the online reservation operation. This has already been panned by some investment sites. Our concern is how the company valued with or without merger rumors. OpenTable is a great service, but its value seems full.

Simple math is why we say that this company is overvalued. The market cap of just over $1 billion in based on a $45.00 share price is where this gets sketchy. While Yahoo! Finance shows a P/E ratio of 49 for this stock, the reality is that the expected ratios are lower. OpenTable is still expensive at 28-times expected 2012 earnings and 23.5-times expected 2013 earnings. OpenTable also trades at over 6-times expected 2012 sales and just over 5.25-times expected 2013 sales. These multiples just feel too high in the current market.

One caveat does exist here on us calling OpenTable an expensive stock. It has a history of beating earnings estimates and it has been growing sales and earnings. If OpenTable can keep beating its earnings expectations then it may just grow into those high multiples.

OpenTable is one of those companies where we find it hard to get behind. It is a great service when you consider what it does. The problem is that there are few barriers to entry and it can face key competition in local markets where some smaller websites may be a bit more nimble.

The rumor was that Yahoo! Inc. (NASDAQ: YHOO) was interested in it. Google Inc. (NASDAQ: GOOG) has already stepped somewhat into the competition by acquiring more restaurant information sites. Yelp, Inc. (NYSE: YELP) is much more pricey than OpenTable in its forward multiples as it is still losing money. Yelp shares are lower on Monday by almost 2%, but its market value is close to $1 billion.

One issue that may be offering some added support for OpenTable is that its most recent short interest of 9 million shares is almost 12.7 days to cover. Most short sellers do not want to be in the way of a company with buyout rumors, even if the odds are remote that a buyout will come.

At $45.00, the 52-week trading range for Open Table has been $31.54 to $52.95. Does it matter that this was a $100+ stock in early 2011? Not really. We are not alone in thinking that OpenTable is overvalued. The Thomson Reuters consensus price target is listed as $45.77, and the highest price target is $53.00. After getting cut in half and with the valuation argument being present, there is just not enough implied upside here for the risk even if a company like Yahoo! might or might not be interested.

JON C. OGG