Shares of RDE Inc., (OTC: RSTN) the owner of Restaurant.com, shares soared by 52% intraday after a bullish report by Goldman Small Cap Research set a six-month price target of $7.50 per share, a more than 275% increase from its Tuesday price. At press time, shares are higher by 44% at $2.90 per share.
Shares were hot ahead of the report, amassing gains of slightly over 200% in the past three weeks as interest in its services offering yields traction among users and clients. In its report, Goldman sees RSTN as a pioneer in the restaurant deal space and goes further by saying it is the nation’s largest and highest-profile restaurant-focused digital deals brand. He supports his thesis with a compelling set of data, using methodological and empirical models to arrive at his bullish conclusion. Most important, RSTN has the user base to deliver the lofty projections. A recent interview with RDE Inc.’s CEO also was optimistic.
Already, RSTN reaches an estimated 7.8 million customers and offers dining and merchant deal options at over 184,000 restaurants and retailers. That presence will translate into revenue, especially with market analysts predicting that the restaurant industry stands the most significant chance of a snapback sector rebound once the COVID-19 pandemic is put under control. More specific to RSTN, its platform could serve as a leading indicator in the consumer economic recovery and, at current levels, offers a low-priced, high value, pure-play on the restaurant and daily deal segments. Also noteworthy from a valuation perspective, RSTN extends its reach beyond a B2B focus and is extremely popular as a B2C player by serving targeted marketing campaigns that benefit the company users and its clients.
What’s In A Name
Undoubtedly, the brand name itself holds substantial value. Cars.com sold for $872 million in 2017. Behind that sale was Business.com, which sold for $345 million, and Las Vegas.com, selling for $90 million. Thus, in the case of RSTN, the question of what’s in a name can be a windfall.
In fact, with Restaurant.com easily rivaling the name value of Cars.com in the eyes of many, a similar price tag, and keeping with RSTN’s 11.2 million shares outstanding, could make the asset worth upwards of $75 per share. And if history was not on its side, it would be easy to debunk that assumption. However, the precedent is easy to find.
But, let’s factor in the other part of the story since RSTN is not in business to sell its name. Instead, they can leverage its value by working with B2B partners, including Florida Power & Light, Mercedes Benz, and T-Mobile. Those examples are deals that are expected to generate substantial revenue growth that outpaces its peers. That’s happening now. Still, revenues are key.
Goldman SCR modeled its estimates by suggesting that revenue could grow from an estimated $3.6M in 2020 to $14.2M in 2022. Operating overhead eats up a chunk of the income, but, at the end of the day, the Goldman analyst believes RSTN can deliver EPS of $0.17 in 2022. That, in turn, gets him closer to his $7.50 in 6 months, up from $2.00 today.
From an industry perspective, shares today are considerably undervalued. At current prices, RSTN trades at only 2.8x FY21E revenue, which reflects a 57% discount to the 6.6x multiple assigned to the peer group. Assuming the markets address that difference and a similar multiple is applied, shares are again pushed toward the $7.50 price target.
How Does RSTN Make Money
While it’s nice to suggest much higher prices are deserved, RSTN still must produce the models’ revenues. RSTN generates revenue in several ways. The first is transactions based, in which RSTN sells discount certificates for restaurants, complementary entertainment and travel offerings, and consumer products on behalf of third-party merchants. Those offerings generally involve a customer’s purchase of a voucher that can be redeemed with a third-party merchant for services or goods (or discounts). If you are familiar with Groupon, you understand the process.
Through its B2C division, RSTN takes discounting a bit further and sells deeply discounted, no expiration certificates for its core 14,000 restaurants, ranging in value from $5 to $100. As part of that focus, RSTN also sells Discount Dining Passes, which provide discounts at 170,000 restaurants and other retailers. Other programs that can be built into the B2C model could come through “Specials by Restaurant.com” or through bundling of Restaurant.com certificates with various entertainment options, including theater, movies, wine, and travel.
In its B2B division, RSTN turns its attention to selling gift cards and codes. Other products in its arsenal, like Dining Discount Passes, are targeted to corporations and marketers, which use them for specialized marketing campaigns. For the most part, B2B clients use this strategy to attract new customer acquisition, point-of-sale increases, rewards/loyalty, and motivate specific customer behavior. The great news is that no client is priced out of any of the RSTN services, and RSTN already works with B2B partners ranging from small to medium-sized businesses up to Fortune 500 companies. The B2B channel could be the primary value driver in the near term.
The Bottom Line Is What Counts
RSTN is clearly set itself up for success. They have the brand, the targeted programs, and a customer base that is surging. What’s important now is for RSTN’s to ensure it follows their philosophy of offering the Best Deal, Every Meal.
Although COVID-19 is wreaking havoc on the restaurant industry, it will be the one market that can’t be denied a comeback. Everybody eats. And indeed, while returning to normalcy will take time, the past months have introduced many consumers to the restaurant business’s digital side. The growth of in-home delivery service companies, ready to eat meal services, and coupon generating companies have earned investor attention. For RSTN, they could be in a sweet spot to accelerate their own growth in the coming weeks and months.
And with more than 1 million restaurant locations in the US and with industry sales expected to top $1.2 trillion by 2030, RSTN is playing in a sector that will experience massive growth as the return to normalcy allows restaurant owners, diners, and workers to do what they may know best…eat, drink, and be merry.
And when that service return comes, and it will, RSTN will be exceptionally well-positioned to ride that wave of business. Stay tuned.
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