Maybe Yelp Stock Is More Attractive Than What People Think?

  • Yelp stock is down 64% YTD, but could bounce back on improved local revenues.
  • Local revenue at $107.9M for the quarter, adjusted EBITDA increasing YOY with target of up to 40% in the long term while brand advertising revenue declined.
  • Brand advertising is decreasing as a % of total revenue, but Credit Suisse says it was doing more harm than good anyway.
  • Once the Yelp Stock price falls back to where the company can be fairly priced, investors will see the good in the company due to its expanded services and acquisitions.
Yelp Stock is Re-pricing

The general financial consensus regarding Yelp (NYSE:YELP) at the last earnings report was that the company isn’t meeting expectations on revenue and the workforce was shrinking. According to analysts, the lower revenue guidance projections for Q3 and declining hires were among the reasons for Yelp’s miss, as competition in the San Francisco Bay area heats up from digital startups that now dot the landscape. Yet a closer look at earnings would suggest that Yelp is not a company headed for trouble, but a company still growing. Through mergers with companies like Eat24, as well as a tighter advertising layout that cuts down on competitor advertising on specific pages, Yelp is becoming an all-purpose, user-friendly review site with growing revenue, and with greater usage on mobile platforms, is transitioning nicely to a potentially more lucrative medium.

Local advertising and acquisitions strengthen the brand

The second quarter represented the third straight time that Yelp had desktop usage declines, which might have contributed to investors’ trepidations regarding the company given how advertising has traditionally been best suited to desktop. At the same time though, unique mobile users were up 22% YoY to 83 million, bringing mobile searches as a percentage of all searches up to 68%, an all-time high. This has also lead to 77% repeat rates on ad engagement and 61% engagement on mobile ad impressions, both of which show that advertising is having a noticeable impact on Yelp’s searches.

It is true that brand revenue has declined as a percentage of revenue, but this is intentional because Yelp is looking to steer away from this stream given how it would often intrude on competing business pages services, which according to the company, made for a less than ideal user experience. Fortunately for Yelp, this can effectively be made up with local revenue, which is sourced from businesses looking to place themselves on top of Yelp’s search engine. Local revenue reached $107.9 million last quarter, or about $1,111 per account, which is enough to overtake brand advertising as a percentage of revenue. With food delivery services like Eat24 being added to the Yelp family, as well as restaurant reservation program Seat24, these business accounts can grow in value to the company and advertisers, who now see a one-stop destination for finding restaurants and grabbing a seat at the table or a quick meal to go, a greatly increased convenience for mobile-dependent users.

Why it may be good to buy the drop

The Yelp stock price has fallen 58% year-to-date, largely due to internal concerns regarding stagnant work hires as well as the fact that the company had a high IPO price.

YELP Stock YTD Performance

Source: Yelp Stock Price data by Amigobulls

But financial houses like Credit Suisse haven’t shown much concern, saying that the company is not “flawed” and brand advertising might have done more harm than good to Yelp. In restating their confidence on the company, Credit Suisse made special note how the investments in related companies, as well as user-friendly improvements have the potential for strong return on investment for local businesses, which Yelp predicts will be nearly 269% in ad driven leads compared to other forms of advertising. Also, with sales and marketing at 50% of total revenue, down from nearly 75% in Q2 2010, Yelp is further optimizing leverage, which is necessary if its Adjusted EBITDA margin of 35-40% over the long term is to be attained (and given its increase from 12% to 18.8% between 2013 and 2014, it might be a realistic goal).

In summation, Yelp might not be in free-fall, but rather coming back to a more realistic price point for its services. At $23/share as of August 21, it might still have some room to fall, even though it is in oversold territory according to its 14-day relative strength index. That could make it a buying opportunity headed into the next quarter as investors shift focus towards its other revenue models. When that happens, Yelp will be recognized for what it is, not what is isn’t.

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