After Yelp (YELP) substantially exceeded the second-quarter consensus, the share price escalated by approximately 23%. The news was followed with several columns authored by skeptics who made great effort to draw parallels to the Internet bubble of the late 90s. In his column titled "A little Reminder of What Happened in 1999," Seeking Alpha contributor George Kesarios drew a comparison between the valuation of today's YELP and the castles in the air of that era, specifically Yahoo and Intel.
Having long been a value investor first and foremost often put me on the short side of the market in the late 1990s and early 2000s. Back then the "short" side was where the real value was. Regarding the era itself, I agree with all Kesarios pointed out. Yahoo and Intel were indeed bubbles and I made near 10 fold returns being short each of those companies via Put options. (Anyone can make such claims; therefore, I include links below this article to time-stamped, 3rd-party blogs in which I expatiated upon my reasoning for being short some of the most notorious bubbles in modern history).
I haven't changed much since then and am still active on the short side of the market - yet I am long Yelp. Amateur short sellers have this dead wrong, mainly because they are using unimaginative, cookie cutter thinking and plug-in formulas in their analysis. One can follow their publications and see that they use very similar rhetoric and level often unfounded charges against every stock they short. The problem with canned analysis is that it works on some stocks in the way throwing darts might work. They succeed in spite of themselves. It's bound to happen occasionally. It is dangerous to make blanket statements about companies and casuistry to compare standard price multiples between companies that are in quite different businesses one from another.
When Yahoo, AOL and Intel were trading at those large multiples to revenues, those companies had market caps in the hundreds of billions of dollars. Yahoo had barely ever turned a profit at that point!
When you are trading at near a quarter trillion market cap a couple years out of the gate, it is pretty hard to pull off an encore unless you do what Google has done and revolutionize new industries with hardware, smartphones, virtual reality glasses and even self-driving cars. That's all you have to do!
YELP is not even close to where YAHOO or Intel were valued at the time Kesarios points out. Yahoo and Intel had nowhere to go but down as an enormous number of Americans were already using their products and services. There were not as many new markets or new customers left for them at that point and their market caps had already baked in their best-case scenarios for the future.
YELP is a relatively small company gaining critical mass in a multi-trillion dollar industry. Sure, 7x revenue is a high multiple in general but not necessarily when the revenue is in the hundreds of millions of dollars. Yelp has a unique mixture of growing revenue sources. Some of its services such as "Yelp Deals" and gift certificates allow it to actually share revenue from the sales it generates similar to companies like Priceline and Groupon while capitalizing on the highly effective local ad revenue around the nation and internationally.
Yelp is positioned to capitalize on effective strategies of multiple industry leaders, giving it diversified revenue sources. While reading many restaurant reviews, my impression was that not only were many of the reviews helpful, it was apparent that there exists a strong social media aspect to Yelp. The readers can read and follow personalities within the community that they find particularly helpful or even entertaining. Many of the members have long established histories, profiles and even photographs of themselves. Anthony Weiner is not a member as far as I can tell.
The social media aspect of this helps to solidify Yelp's growth and appeal. Consumers tend to stick with services that build a strong sense of community and by virtue of there being copious quantities of reviews for virtually every restaurant in my area (and other areas I checked around the nation), it is clear this service is going to continue to grow exponentially. As Jim Cramer put it "Yelp is winning in a number of different ways. First, as more and more people use the service, it becomes harder and harder for businesses of all types not to be on the service. And as more and more businesses get listed, well, that only drives more people to the site in a virtuous circle."
In my previous column, Why Yelp Is Still By Far Undervalued, I enumerated the annual revenues of the restaurant and entertainment industries in which it is on the cusp of dominating. I compared them with the revenues of the $800+ billion annual travel industry.
The Priceline.com (PCLN) comparison was appropriate because it too has plenty of competition with other travel websites like Expedia, Orbitz, Hotels.com, etc. Yet - Priceline still commands a $48 Billion market cap notwithstanding competition and it only trades at a P/E multiple of 31.
In industries of this size whether you are talking about restaurants, airline tickets, hotels, social media or automobiles - there always seems to be room for a handful of players to compete - and still grow into revenues and market caps in the tens of billions or more for each company. You often end up with a half to a dozen major players. The cream rises to the top and it is clear that Yelp will be at or near the top of the leader board.
The competition concerns being propounded by the Yelp short sellers have a dampened ring of desperation and fear mongering. The assertions that Google (GOOG), Facebook (FB) or any of the others will "easily replicate" the Yelp strategy do not have basis in e-commerce history. I can definitely understand why shorts would come to such erroneous conclusions because I too thought that way when I was younger and the Internet was in uncharted territory.
They are erroneous conclusions yet they are partially right. The aforementioned giants can replicate the web applications. They are erroneous in that they are misunderstanding the other key part of the equation - the consumer. They are fallaciously assuming "if you build it, they will come." Perhaps if you build a baseball diamond in a cornfield it will indeed resurrect dead baseball legends. But just because Google announces "we're now in the restaurant business" doesn't mean the people who love its search capabilities are going to prefer Google to meet that particular need. As we have seen, just because Google builds the infrastructure for a web store doesn't mean the billion people who use Google search or Android phones are going to stop using Amazon and eBay to instead shop Google's store.
This is also a case that I made in the past for Netflix (NFLX), but it also applies to Yelp in a broad sense. I have had my YouTube account since 2004 and I use it daily. However, I have absolutely no interest in streaming my movies on YouTube and have for years stuck with Netflix for that facet of my entertainment needs. I like the way Netflix serves those needs and do not mind paying for it.
I remember back when Netflix started the streaming service around 2004. Before having those Redbox machines in its entrances, Wal-Mart was touted by the NFLX short sellers and the media as being on the verge of crushing Netflix because it had grandiose notions of launching its own movie rental business, digital download and all. Surely Wal-Mart is so large, has so much capital and an enormous customer base that dwarfed Netflix - there was no way Netflix would survive. What ever happened to those predictions? With limitless capital and all of those customers, how could it fail to destroy the much smaller Netflix? It is a false assertion to make it sound as though all a company needs is a large customer base and plenty of capital to run ads, in order to become the leader and simultaneously destroy the competition - in any industry.
In my bullish articles about Netflix from January 2013, before the share price went on its parabolic tear, I shared my valuable lesson from shorting Amazon.com back in 2002, and illustrated how I used that mistake to make great returns on future investments like Netflix:
Short interest is high and those shorting YELP are playing a dangerous game. It seems their goal is to press it down as much as they can with plenty of time to exit before the next earnings report. However, there may come a day before then in which these shares gap up substantially, creating a whole new crop of wait-staff to work at the companies YELP users are reviewing.
I can see the commercial now, reminiscent of the Turbo Tax commercial where home owner "Allen" walks into his kitchen and realizes that the handyman working under his sink did his taxes last week…
Only this commercial features a customer who recognizes his waiter:
Allen (Customer): "Bob, what happened, I thought you managed a hedge fund for a living…?"
Bob (Waiter): "I got caught up in a short squeeze with YELP in Q3. Would you like baked or mashed potatoes with your steak sir?"
The short interest is at almost 23% of the float and increasing. The burden is on these speculators because they have to get out of their positions before more phenomenal news comes public - and it will for years to come without Yelp being acquired. As it captures its percentage of the trillion dollar industries in which it effectually operates, this is a company with a Priceline type future monetarily.
Time-stamped, 3rd-party blogs in which I expatiated upon my reasoning for being short Yahoo, Intel and AOL at their peaks.
Regarding Yahoo I remember haranguing my audience like a fire and brimstone preacher from the studios of WSBR 740AM, equating the valuations to stories of the tulip bulb craze and the infamous South Sea Bubble. I remember having purchased the Put options on Yahoo with the $40 strike price while Yahoo was at that time trading at a $180 BILLION market cap. At $180-$200 a share, to the vast majority of the investing public, it was inconceivable that Yahoo could ever go as low as $40.
That's why I was able to get the LEAPS with durations of a year for pennies on the dollar. There was very little premium on the time horizons since it had been so long since the world had seen a bubble like this. I did the same with the AOL Puts. AOL had at that time had surpassed AT&T as the most widely held stock in America!
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