Is It Time To Check Out Of OpenTable?

OpenTable Inc.'s (NASDAQ: OPEN) stock has seen a run-up of over 200% since January 2010 and one has to wonder if the his growth can continue at this pace or if the stock will soon falter. OpenTable is an online network that allows people to view and reserve available tables as restaurants. A recent note from Seeking Alpha said that OpenTable's rich valuations prompted a closer look. In OpenTable's recent earnings report, 2010 net operating income was $17.9 million. The company has a $2.06 Billion market cap. The combination means that the company's earnings are about 0.86% of what you are paying as a shareholder. According to the report an shareholder could invest in a CD and have the same yield without the risk of a huge decline in equity value. At this high valuation the share price could tumble any time. OpenTable does not have much, if any competition, and analysts of the company have made it known. A recent report from Forbes projected OpenTable's growth into the year 2017, without taking into account any competition that may come along. According to the National Restaurant Association, there are about 960,000 restaurants in the US and according to OpenTable's last earnings report, the company said that almost 14,000 restaurants use its services. Does this mean that OpenTable has hardly scratched the surface of the market? Not necessarily. OpenTable is a free service for the dining guests and it makes its money mainly through restaurants using its services. OpenTable's reservation service costs restaurants about $1 per diner when the reservation is made through the website and $0.25 when the reservation is made through the restaurant's website. Depending on the size of the restaurant, the type of clientele, and the prices charged per dish, this could potentially result in large overhead. There are many (types of) restaurants that cant afford the overhead like fast-food restaurants and many other establishments like smaller family-owned asian, mexican, and even bar-b-q restaurants, that charge between $3-$10 per meal, would probably not do business with OpenTable because the high cost per diner. In this case the possible profit per diner could be staggering low. Competition for OpenTable could enter the marketplace very easily. Since there are nearly a million restaurants registered with the National Restaurant Association, the NRA could easily set up a site that includes the services that OpenTable provides for free with their membership. The NRA wants to increase its membership so why wouldn't it create a model like this? In today's economic climate everyone is trying to save money when possible and when margins are already drastically low, spending potentially $1 per diner could really take a bite out of profits. Should competition come along from the NRA or anyone else, OpenTable's valuation could crumble and the share price could drastically collapse. Disclosure: No position in OPENOPEN is trading 5% lower at $84.50