With a forward P/E of 858 and a price-to-sales ratio of 15, Yelp, Inc. (YELP) is a very expensive stock…even with reported net revenue year-over-year growth of 64% in the second quarter. In its last earnings report, YELP was able to generate a lot of excitement by ever so slightly raising earnings and revenue guidance: (for example, for FY12, revenues to $135-136M from $128-132M). Full year revenue growth of 62-63% apparently reassured the market.
Given these numbers, I was surprised to see YELP subsequently rally so strongly, but I believe this is a case where the relative context mattered. Sentiment had soured deeply on internet/social networking stocks going into YELP's announcement, and YELP managed to roll out news that could survive surface scrutiny.
The stock's subsequent 17% gain was a bit exaggerated by the large sell-off going into earnings. However, more importantly, YELP managed to jump back over its 50-day moving average (DMA) and continue rallying for four more days. On the fifth day, Thursday, August 9, YELP managed to push ever higher, this time above the closing high set on March 28th. The stock was up as much as 9% on Thursday before the rally imploded on a massive reversal. YELP ended the day DOWN 3%. The chart below represents all of YELP's trading history to-date.
YELP's post-earning rally comes to an abrupt end just above the all-time closing high
The chart cannot show the magnitude of the trading volume given the large distortion from the first day of trading. The 1.8M shares traded was twice the 3-month rolling average (an intraday chart shows volume surging into the highs and off the highs of the day). This kind of massive reversal on high trading volume at an important high price point is typically a sign of a blow-off top. This is a moment where the last enthusiastic buyers rush in to buy into a story, momentum, etc.. exhausting the roster of new money willing to take the shares ever higher. Encroaching upon the vacuum is a trading/investing base that is dominated by people eager to take profits.
YELP experienced a blow-off top on March 28th as well. In this case, the stock gained 37% in just three days in a move that essentially turned parabolic, quickly exhausting the inventory of new buyers and new money. The end result was a protracted sell-off that lasted two months before it bottomed with the rest of the stock market. I noted the first blow-off top as YELP made its first critical test of support post run-up. I can identify the blow-off top earlier this time because there is an easy reference point now in the all-time closing and intraday highs.
YELP last printed a strong sell signal when it rallied right into the closing high before fading away from it. I described those dynamics in "Back Into Puts As Yelp.com Fails to Establish New Highs."
YELP can only invalidate this latest strong sell signal by printing new all-time highs and following through with more momentum. I strongly suspect that YELP will at least retest the 50DMA around $21.50 before it is able to attract fresh momentum. Even so, at some point, YELP's extremely high valuation will eventually catch up to it. These repeated fades from the $28-30 level are signaling that the extremes in YELP's valuation are likely already being rejected slowly but surely.
Be careful out there!
Additional disclosure: I am short YELP through puts options.