Is Yelp a Buy, Sell or Hold? Here’s the Answer

Yelp is currently priced around $42, just below its 52-week high of $43.41. The company has enjoyed a flurry of good news across the past couple of weeks, and there is certainly plenty of hype surrounding Yelp’s stock. Yet, many are questioning whether investing in an online reviews business is prudent.

Headquartered in San Francisco, Yelp employs more than 4,000 people. The company develops and hosts a popular business review website and mobile app. These reviews are crowd-sourced from customers around the world.

Yelp also provides an online review service known as Yelp Reservations. Another Yelp stream of revenue stems from its training service. The company teaches small businesses how to best respond to reviews, host reviewer social events and analyze data.

Yelp.com enjoyed 135 million visitors each month in 2016.

The vast majority of Yelp’s revenue stems from business advertising. Companies pay for ads and sponsored listings on the popular online review directory. Plenty of businesses are willing to pay Yelp to place their ads at the top of search results, or even feature their ads on pages of competing businesses. Yelp’s ad revenue is growing at an impressive 30 percent rate on a year-over-year basis.

Weaknesses

Yelp’s reviews have been criticized as being illegitimate, with the company itself also criticized for allegedly altering and even blocking reviews to boost business ad spending. Yelp limits its advertising to companies with a minimum of a three start rating.

The company’s second quarter results show there are some serious hurdles to overcome. Yelp’s management made it clear that the company’s investments will weigh down earnings for quarters or even years to come. The company has failed to convert a high percentage of claimed local businesses into actual advertiser accounts that generate revenue.

The Good News

Yelp’s stock soared in the past weeks thanks to its eye-opening second-quarter results. The sale of Yelp’s Eat24 enterprise to Grubhub for nearly $300 million also attracted plenty of attention. Yelp will soon integrate online ordering from Grubhub sites on its local services platform.

All of Grubhub’s locations will provide takeout and delivery orders by way of Yelp. This move will double the total number of restaurants with ordering integration on Yelp’s site. Yelp’s brass made out like bandits with this deal as they paid a mere $134 million for Eat24 in 2015.

Yelp’s quarterly revenue jumped 20 percent on a year-over-year basis to just under $209 million. This growth is fueled by increased usage of Yelp’s app and a spike in advertiser accounts. The company’s adjusted net income of $21.6 million is a mammoth leap from its $12.5 million in the same period from a year ago. Account churn has decreased compared to this period of 2016. Yelp’s request-a-quote business is up nearly 50 percent on a quarter-over-quarter basis. It was also announced that the company’s board of directors approved a repurchase upwards of $200 million of common stock.

Numerous analysts elevated their Yelp price targets after news broke of its excellent quarterly results. At the moment, 13 analysts have strong buy ratings on Yelp. Two analysts have buy ratings. More than a dozen analysts have hold ratings.

No analysts have rated Yelp as a sell or strong sell. The average rating is a 2.0 on a scale in which one is a strong buy and five is a strong sell. This rating has steadily improved from 2.19 three months ago and 2.14 one month ago.

Is Yelp Worth Your Money?

It is clear that plenty of people feel comfortable investing in this crowd-sourced reviews website. The stock is soaring. Analysts like JPMorgan, Credit Suisse, SunTrust, Deutsche Bank and Jefferies have bumped up their price targets. However, the company has gone far beyond the average analyst’s 12-month price target of $37 and change. Though there are certainly analysts with price targets as low as $25 and as high as $50, Yelp has blown past the vast majority of price targets.

For all the positive news Yelp has enjoyed in recent weeks and months, expectations should be tempered. Do not lose sight of the fact that this is an online review business. The stock might be headed for somewhat of a bumpy road. It is certainly possible that increased margin pressure and the potential of slowing revenue growth spurred by the arrival of new competitors in Yelp’s core business will keep the stock in check. Industry analysts are insistent that large digital advertising companies are gaining an ever-growing share of the market.

If you have made money on Yelp, consider selling some or all of your shares while the stock is hovering around its 52-week high. If you do not own Yelp and are not concerned with investing in an online reviews website, wait for the stock to dip before buying.

Regards,

Ethan Warrick
Editor
Wealth Authority