YELP Stock Forecast: Is Now a Good Time to Buy?

 

 

This article was written by Isabelle Tao, a Financial Analyst at I Know First.

YELP Stock Forecast

“On the internet, competition is one click away” – Jeremy Stoppelman, YELP CEO

Highlights:

  • Strong Q2 performance
  • Ramping up battle against Google’s monopoly
  • Growing revenue from changing advertisement business model
  • I Know First’s Algorithm is Bullish for YELP in the Long Run

(Source: Wikimedia Commons)

Yelp (NYSE: YELP) is one of the 20 most trafficked websites in the US, though CEO Jeremy Stoppelman clearly think it is not enough. Incorporated on September 3rd, 2004, the company provides the ability for consumers to voice their opinions on business experiences for others to see. The company competitors include Google, Yahoo and Facebook.

Strong Q2 Performance

Yelp’s stock jumped more than 11 percent in the extended session after the company reported strong second-quarter results. It beat estimates for its top and bottom lines, reporting earnings of 12 cents per share vs expectations of 1 cent per share, and revenues of $235 million compared to expectations of $232 million in revenues.

Growing customer base against competitors

Yelp said the number of active devices using its app rose 15 percent year over year to more than 32 million. 82% of searches were done on a mobile app and 68% of Yelp reviews were generated on a mobile phone. In the past, Yelp has grown by getting users to write reviews of businesses and engaging them with social media and discount. Despite the popularity of the Yelp App, it still faces stiff competition from social media and search engines that compete for consumer traffic.

Growing network effect

Yelp’s network effect is in its customer reviews. As more people use its platform, more people write reviews. This in turns draw more people, increase traffic to the site and improve its value proposition to businesses. Hence, Yelp can charge more for advertisements. Companies with similar business models into Venmo. Having reliable information and reviews accessible on an easy to operate mobile app gives Yelp a competitive advantage that is difficult to replicate.

Yelp VS Google

Yelp and other American technology companies are pushing hard to get regulators to launch probes of Google for breaking antitrust laws. Yelp accused Google of “destroying jobs and stifling innovation” because Google is giving itself an unfair advantage using its search engines. For example, if someone searched for “best steak Philadelphia” on Google, the first results are reviews and restaurants from Google’s own recommendation. Below those are links to reviews, articles and websites like Yelp. With Trump hammering on Google again over search engine bias, Yelp stands a better chance against Google and other big social media companies.

Growing revenue from changing advertisement business model

 

(Sources: Flickr)

Yelp generates almost all of its revenue from advertising, primarily two kinds of advertising:

  1. Local advertising: businesses that want to be featured on Yelp will be displayed first before the organic results.
  2. Brand advertising: display and text ads on Yelp.com, which gets more traffic from search engines.

 

Yelp recently moved from selling $4,000 annual contracts to no-term contracts with flexible pay-per-clicks. I believe this is likely to attract a large amount of local business owners, because the new contract is much more financially manageable than 12 months contracts. The new payment model will significantly reduce the upfront cost and make it easier for and small retailers to sign up to Yelp. Yelp’s advertising segment has accounted for almost 90% of its revenue. In Q2-2018 advertising revenue rose to 96% after the sale of Eat24 to GrubHub.

Healthy Financial Statement Analysis

The financial strength and profitability is high for Yelp. Yelp’s balance sheet is debt free. Cash flow is also strong at around $29 million, giving them the space to acquire other companies should the opportunity arise. Yelp’s largest cost now is the 3,300 person sales force garnering new paying Yelp advertisers. Strong cash balances allowed Yelp to repurchase 1.6 million shares. If management continues to buy back shares, this is a signal that the shares are at an attractive price. The current ratio for Yelp is 13.68 and the industry average is 2.54, which suggests high ability to pay short term obligations.

Analyst Recommendation

 (Source: Yahoo Finance)

The current analyst consensus rating supposed at 2.4 on company shares (1.0 Strong Buy, 2.0 Buy, 3.0 Hold, 4.0 Sell, 5.0 Strong Sell).

Conclusion

I believe YELP future growth is strong. The switch to the pay-by-click model from 12-month contracts will likely attract many smaller local businesses. YELP also stands a better chance in the lobby against Google for search-engine bias, though the impact will not be immediate In the meantime, its mobile app is driving most of the growth and traffic which grows along the rising mobile users. Yelp’s balance sheet is debt free which suggests healthy company cash flow for probably acquisitions.

Yelp is the 21st-century version of the yellow pages, and is one of the top 20 most trafficked websites in the U.S. according to ComScore. With approximately $1 billion of sales and two hundred paying local advertisers, Yelp captures ~1% of total local advertising market and ~2% of small businesses. The business has grown at a 25% CAGR since 2014 and has consistently added net new paying advertisers every quarter since IPOing in 2013. We believe Yelp has a very long, multi-year runway in front of it and like owning a business that has consistently grown its customer base (and cash flow). As consumer engagement, local reviews, and the number of paying advertisers grow, the business is becoming more valuable every day.

Current I Know First Bullish Forecast

The forecast for YELP is bullish for the one month, three month and year-long time frames.  The strongest being the year-long forecast with signal strength of 184.96 and predictability of 0.65. However, the one month and three month forecast are both strong buys with signals of 2.45 and 13.09 respectively, with predictability of 0.47 for the one month time horizon and 0.65 for the three month time horizon.

Click here for instructions on how to read the I Know First forecast prediction.


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