IPO hopefuls want to sit around OpenTable
By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — The Internet industry’s newest crop of IPO hopefuls wants an OpenTable glow. They’re all conjuring comparisons to the restaurant booking website, whose shares have risen five-fold since debuting. While similarities exist, none of the comers can quite match OpenTable.
Don’t blame underwriters and venture capitalists for trying. OpenTable’s $2.5 billion market value now means it trades at an enviable 17 times the $146 million analysts expect the company to book in sales this year. And the stock fetches 96 times consensus estimated earnings per share of $1.10.
No wonder a handful of companies harnessing the Internet to add a new twist to relatively old-school business models want to sit around OpenTable. Two already have filed IPO plans — Pandora in the radio trade and Zipcar in the rental car space. Zillow, the real estate information service, could launch an offering soon, too.
All of them may deserve to trade at a premium to their Jurassic competitors by dint of enormous top-line growth rates. Pandora’s annual advertising sales more than doubled in the year through Jan. 31. Zipcar’s top line grew 42 percent in 2010.
But investors sizing them up against OpenTable ought to consider the distinguishing factors. First, both Zipcar and Pandora are clawing most of their sales away from traditional rivals. That limits the revenue pools they’re stealing from. It also means competitors will fight back.
That raises a fresh question about barriers to entry. Zipcar has created a handy network of locations for its car-sharing customers, but Hertz has begun to create one of its own. Pandora’s brand is valuable and the stations its clients create makes the service sticky, but it has no exclusivity on the musical content it provides.
OpenTable is in a different class thanks to the network effect. Every eatery that uses the reservation software makes the service more valuable for the site’s users. And restaurants will be happy to pay fees to OpenTable so long as it generates additional demand.
It’s hard to blame any IPO newbie wanting to cast itself as the OpenTable of its industry. But with few exceptions, investors should know better.