The online dining segment: Growth rates aren't amazing
What does Yelp (NYSE: YELP) , OpenTable (NASDAQ: OPEN) and Groupon (NASDAQ: GRPN) have in common? Well, in various degrees, all of these companies have exposure to the online dining segment. At first sight, this market looks highly attractive, because it seems that at least in America more users are using Internet and apps to make their online reservations, read restaurant reviews and earn points for free meals.
Attracted by the increasing number of users relying on online booking for their dinning both in America and all over the world, several startups are also in the game. But does this segment truly represent an investment opportunity? In this article I explain why I'm bearish. Later, we will analyze in detail 3 key players and provide an investment thesis. Keep reading!
Why online dining is not worth your time and money
To begin with, online dining isn't a new concept. It has taken OpenTable, the early mover in this segment, more than 12 years and probably lots of sales people to achieve the current scale it has. These guys practically made the market, so we can use their scale (number of registered restaurants) as a reference of how the overall market size looks like in terms of current size and growth.
Looking at the number of installed restaurants of OpenTable since the first quarter of 2010, we can see that there is a clear decreasing trend in the growth rate of restaurants in the past 3 quarters. Also, the "international" component doesn't seem to have changed that much in size since the first quarter of 2010. This picture suggests that online dining isn't really getting hot nowadays. Most likely, the growth rate of other services will be different, because some startups may be on the early stage of growth. The long-run picture, though, shows that once you reach 20,000 restaurants, it's hard to keep growing at the same pace.
20,000 - 30,000 restaurants may sound like a big number but remember that this segment has low barriers to entry, and increasingly fierce competition. Also notice that it is not desirable for any restaurant owner to have its booking system highly dependent on a third-party application. This is because restaurants want to own their own data, avoid paying for licenses to access their own book and avoid fees. Luckily for restaurant owners, it's becoming increasingly easier to have a functional booking system on your website, do search engine optimization to promote your location and use free tools like Google Maps or Waze to reach nearby users. Therefore, each of these restaurants is also an indirect competitor, which doesn't look so sustainable. Most restaurants would prefer to go for a fixed payment and have their own online booking system than relying perpetually on a third-party app.
Now, let's analyze 3 representative stocks and see how they are dealing with these issues.
OpenTable: The dominant player, for the moment
With a P/E of 56.79, OpenTable is the biggest player and an early mover. OpenTable's main upsides include a relatively high customer retention and a long history of earnings and revenue growth. The downsides are that the growth rate of revenue is showing some recent decline, and that international operations still represent a tiny contribution to total revenue. The international business isn't really growing and that keeps me worried, since the current P/E ratio suggests most investors look at OpenTable as a growth stock. For example, since 2006 OpenTable only managed to register 1,660 restaurants in Japan.
In one of its presentation slides, OpenTable mentions in the financial highlights section: "Predictable, profitable revenues". Allow me to disagree. Further competition can lead to a forced decrease in fees and this could have a direct negative impact on margins. Also, how to explain the slight deceleration in number of restaurants registered? Finally, the stock price is highly volatile. It rocketed to almost $120 in 2011, only to sink to $30 by the end of the year.
Yelp's acquisition of SeatMe makes it a wonderful competitor at the right time
Early in July, global consumer review company announced it will acquire SeatMe, an online restaurant reservation service founded by Alexander Kvamme and Jordan Mendelson in 2011, for $12.7 million. The acquisition looks quite strategical, because Yelp has put a lot of strenght on driving revenues from ads, and SeatMe, which is basically a software and not a search engine (OpenTable provides both services) sounds like an interesting complement. Yelp already has strong traffic and customers, so SeatMe is exactly what the company needed.
I went for a free trial and was amazed with the user interface, the speed and intuitive way of working that SeatMe has. Even better, it looks much cheaper than OpenTable and has no set-up fees. If Yelp can build a massive directory of restaurants using SeatMe, this could be a strong cash cow in the making. It seems like SeatMe is still pretty small and has a lot of room for growth.
Groupon: more than just booking
Groupon is different due to its group-buying feature. It also doesn't provide any booking system, so it's all about traffic and the ability of sending customers to a given restaurant. Since Groupon goes beyond dining, it is not totally exposed to this segment, and its potential growth limits could go beyond OpenTable easily. Yet Groupon has its own issues regarding profitability. Finally, Groupon's business model main weakness is the fact that is much more easier to get a user registration than to get a restaurant registration, as high fees, massive discounts and sudden demand are not desirable for many owners. But despite having a somewhat flawed business model, Groupon is still growing its revenue significatively and generating positive operating income.
The bottom line
This segment doesn't really look attractive once you take into consideration the low barriers to entry, the disadvantages some restaurant owners may feel, increasing competition and the current growth rates of the biggest player. Sure, there is still room left for further growth, but there are more interesting alternatives for those searching for growth stocks.