OpenTable IPO Rises 59%; Critics Sneer

May 21, 4:54 P.M. ET, WSJ

By Lynn Cowan

Online restaurant reservations system OpenTable Inc. dished out the best IPO performance since late 2007, delivering a heady 59.5% gain on its first day of trading Thursday.

Shares of the San Francisco company closed at $31.89, up $11.89, on the Nasdaq, well above its initial public offering price of $20. Investors would have to go back to December 2007 to find a better first-day close, from Orion Energy Systems Inc., which rose 65% in its debut.

Analyst reaction to OpenTable ranged from early enthusiasm to guarded caution as it climbed ever higher toward the end of the day. Thursday morning, IPODesktop.com president Francis Gaskins called OpenTable's recurring revenue the "holy grail" of IPO investors, and praised its lack of competition in the U.S. market. As the stock turned sharply higher in the final hour of trading -- at one point reaching $35.50, a 78% gain -- Mr. Gaskins balked, saying the small offering of three million shares could be pressing the price forward.

"At this stage, it's over the top," he said.

Indeed, 4.9 million shares changed hands during the day, 1.9 million more than the amount sold in the IPO.

The deal sold at price above its expected range of $16 to $18; that range was raised by $4 earlier this week in response to increased investor demand by underwriter Merrill Lynch & Co.

OpenTable's debut follows the warm reception encountered by software company SolarWinds Inc. on Wednesday. That stock ended its first day of trading up 10%, and held on to that gain Thursday.

OpenTable's offering is considered the second venture capital-backed IPO of the year (after SolarWinds) by VentureSource, which is owned by News Corp., parent company of this newswire. OpenTable is the first company that has priced above a boosted range since fertilizer company Intrepid Potash Inc. went public in April 2008.

OpenTable, which began in 1998, is best known by consumers for its Web site, where they can book reservations. But it makes its money from the restaurants themselves, first by charging them for installation of its computerized system, and then through monthly subscriptions and per-diner fees.

The restaurant industry is highly exposed to the downturn in consumer spending, and the company believes that the total number of reservations, including reservations by phone, seated by its restaurant customers decreased approximately 10% to 15% for the fourth quarter of 2008 compared to the same period in 2007.

Despite such sobering statistics, OpenTable continued to add restaurants to its system and seated more diners throughout 2008 and into the first quarter of 2009. Revenue increased 36% in 2008 and 21% in the first quarter of 2009, compared to year-ago periods.

The company's bottom-line financial performance is erratic, with operating losses in four of the last five years. In 2008, it produced operating income, which was erased by income-tax expenses, producing a net loss.

Analysts had mixed outlooks on the valuation OpenTable's IPO received. Virtua Research calculated a price for the company at $16.79 cents, using a discounted cash flow model. Morningstar assigned a fair value to the stock of $11 a share, but using different projections, said it could be worth as little as $9 a share or as much as $17, depending on factors ranging from market share expectations to international expansion expenses.

Morningstar analyst RJ Hottovy says OpenTable doesn't have any serious rival in its space, and has grabbed an early advantage over any newcomers -- it's installed at nearly one-third of U.S. restaurants that take reservations, a customer base that is unlikely to switch systems. While the company might be affected in the short-term by lower consumer spending, he said longer-term, it will benefit as more restaurants seek new ways to fill seats.

A dim view of the deal was held by Scott Sweet, managing director of research firm IPOBoutique.com. If OpenTable has already nabbed nearly one-third of the U.S. reservation-taking restaurant market, and its overseas prospects are uncertain, he reasons that the company's annual revenue could hit a ceiling at around $160 million a year from the U.S., if it managed to grab all the remaining American market share. He believes the pricing of OpenTable was affected by the small number of shares being offered, and that scarcity was the primary driver of first-day trading momentum.

"This IPO environment has not and should not see a pricing like this, considering this type of company is very prone to the recession that many are predicting will go well into 2010," Mr. Sweet said in a research note. "I believe that once sanity prevails, it will likely trade down hard."