Friday, May 29, 2009 and Borders, things to avoid.

It has been a while since I last posted. My real day job has been pretty busy, but let's jump straight into some stock editorial. Two stocks received some prominent focus this week in the press. OpenTable and Borders.

OpenTable kickstarted an IPO on a very high note, trading 59% on the opening day. They run a business of selling reservation systems to restaurants (hardware/software), but most of their focus at the launch of their IPO centered around their online reservation business at Customers can secure reservations online, the restaurants pay for the service.

A lot of hype pushed this stock beyond a reasonable valuation during their IPO launch. The restaurant business is extremely competitive in a good economic environment. Its going to get tougher, some chains will have to shut restaurant locations down. For OpenTable to sell hardware/software into their current accounts will be tough, growing that base will be tougher.'s online reservation site is a one trick pony, and they have to convince more people to drop phones and reserve online. The valuation is not sustainable.

Now moving on to Borders. This company has some major headwinds to overcome besides the economy. The company reported a loss of $86 million for the quarter compared with a loss of $31.7 million a year earlier. Borders carries short term debt of $319 million, and long term liabilities of $374 million. They currently carry cash and equivalents of $45.7 million. If you do some simple math and look at their cash flow from operations for the quarter, you'll see that they scraped only $2.4mm from operations, for which they dumped straight into capital expenditures (keep the lights on projects most likely). Liquidity problems will surface towards the end of 2009 and early 2010 if they do not pick up sales quickly. The competition from Barnes & Nobles and Amazon will continue to put the squeeze on Borders. While Amazon focuses on strategic direction and new business models, Borders will be focusing on survival.

Investors need to stay sensible. One company has an extreme valuation, while the other will be fighting against liquidity issues.


Anonymous said...

I'm not sure you understand Opentable's business. First, they don't "sell hardware/software into their current accounts." Restaurants who are on the Opentable network pay a monthly fee for being there. Once they're sold, they're sold. Second, Opentable is an effective monopoly in the restaurants in which they operate. There can only be one real-time reservation system in any given restaurant, and there is only one reservation book. Sure, restaurants could also take fax or e-mail reservations from other online sites, but those would have to be subject to confirmation and would be in conflict the restaurant's database of record -- the Opentable Electronic Reservation Book. Finally, you're missing the network effect. Each new restaurant that joins the Opentable network is exponentially more valuable to the entire system than the one before it. By way of analogy, one fax machine is pretty much worthless. Two fax machines are useful, but extremely limited. A million fax machines and we're starting to get somewhere. This is Opentable's story. In their core metropolitan areas (San Francisco, New York, Los Angeles, Chicago, etc.) being an Opentable restaurant is becoming a necessity, not a luxury. This is because of the network effect. The more restaurants that are signed up, the more valuable the online reservation function is to diners. The more diners who use Opentable, the more valuable the system is to the restaurants who use it. And we haven't even talked about the core value to the restaurants -- it's not reservations, it's the CRM (Customer Relationship Management) functionality that the Electronic Reservation Book affords.

Take all of these things together and then realize that Opentable has barely penetrated the market in North America and is now successfully launching all over Europe and Asia, and I think you have a prescription for justifying high P/E multiples. With over 10,000 restaurants and over 100,000,000 diners seated Opentable could very well be poised for extremely rapid growth as the network effect kicks in high gear. Food for thought and just my two cents...

DT said...

Once a restaurant or chain picks up the service from OpenTable, it is not plugin/play and good bye. They sell reservation systems sitting on hardware/software. This requires upkeep/maintenance. If you look at the job listings on their site you'll see the need for a "Field Operations Specialist"

There is promise in building a pretty robust CRM database at which point they can throw analytics over it to drive specific customer programs, but they'll need enough volume at a single restaurant or chain (Lettuce Entertain You for example) to pull anything of specific value. This volume requires seating patrons. Seating patrons for the remainder of 2009 is going to be very tough. I eat at all the major chains throughout the Chicago area, and I have yet to receive any promotional material based on my dining habits.

Good food sells, not reservation systems, not convenience (think Tomoe Sushi in NYC... people will wait hours to eat there) Penetrating the North American market is a misleading blanket statement that assumes linear growth for OpenTable. In a tight credit environment, resaturant owners will require serious ROI justification for OpenTable's service. The key for any restaurant is to drive seats through good food. That is a necessity. Hooking up with OpenTable is not a necessity. Once you have a base of loyal fans for your food, then yes... you look to OpenTable to drive customer value.

Penetrating the North American market for "excellent/good" restaurants is a more accurate statement. How many good restaurants can you count in your city? I'm based out of Chicago, and I can only count them on one hand... maybe two. The market potential is much smaller than what current shareholders believe.

If this was 1999, and they launched with the same prospectus numbers... then yes, I'd probably join the train ride like in 1999 style. Their P/E in 2009 is simply not sustainable. You're looking at future prospects... I'm looking at current fundamentals. It's not an apples to apples comparison, but your comments provide for good intellectual thought on a Sunday night.

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