- After years of growth and progress, Yelp is trading back down at around its IPO pricing.
- At its current valuation, I believe the company is trading at a 20% discount.
- For investors who are bottom fishing, Yelp might be the right stock to consider.
Yelp (NYSE:YELP) is one of those companies that screams buy when looking at their stock price movement and valuation metrics. However, their speculative nature is worrisome to some investors and will certainly suppress their stock price in this market.
As you can see from the chart, the Yelp stock is trading at near all-time lows, which is surprising given the progress it has made since it hit the secondary market. When hitting the market in March 2012, Yelp’s IPO was priced at $15 a share. Yelp shares closed up 64% on debut. Almost 4 years later Yelp is trading close to its IPO price of $15 and well below its historical highs. So what's changed since Yelp's initial public offering? Well, when it went public Yelp was being valued based on its 2011 financials and future projections. So here is the progress that they’ve made:
- Yelp's revenue in 2011 was $83 million compared to $550 million for 2015; an increase of 563%.
- Yelp's operating margin in 2011 was -19% compared to -4% for 2015.
- Yelp's total shareholder’s equity value has increased from $31 million to $694 million.
So with all this strong growth and progress, Yelp has still lost a large chunk of its market cap. Why? Is Yelp running out of cash? Does it need to take on some debt to meet its working capital needs? Nope, not even close. Yelp has a cash ratio of 3.4, which means it has plenty of cash on hand to run operations and fund future growth without a problem. It appears as if Yelp fell from its highs to a more reasonable price, but then got crushed when the markets became volatile. Now when you look at Yelp compared to the internet content and information industry, the stock is beginning to show signs of trading at a discount. Yelp shares are trading at a price-to-sales and price-to-book value that are significantly below the industry average, and given Yelp's huge growth rate, that could present a big opportunity for investors.
Below I’ve outlined my DCF for Yelp which assumes strong continued growth in the next few years and then a 5% terminal growth rate. I used a 10% discount rate and didn’t assume positive free cash flows until 2022.
As you can see, I am projecting Yelp’s fair value of equity to be about $1.4 billion, which is approximately 20% higher than its current market cap and represents a price of $18.67 per share. This obviously assumes that Yelp can sustain its strong growth trajectory in the near term. However, I have also left room for Yelp to fund that growth with its operating costs and cap-ex.
At its current level, Yelp seems to be trading at a 20% discount. Given Yelp's strong and consistent growth rate, valuations of 2.2X sales and 1.7X book value should be enough to motivate value investors. I would keep an eye on Yelp's growth rate and profitability in 2016 and see if they will be on track to meet the $770 million revenue projection. If you’re interested in bottom fishing in this falling market, then Yelp might be a good stock to consider.