I have been watching Yelp (YELP) rally in recent days (trading near 26 as I type, up from a low of 17.50 last week) as the post-IPO lock-up passed without any supply of stock. A quick look at the chart and the rising sales estimates tells me that some selling was priced in:
The weakness in the stock in early June coincided with not only the lows of the market but also the Facebook (FB) fiasco. Interestingly, the price never closed below the IPO price of 15. Here we are, back to where the stock was roughly when it opened for trading. YELP has slightly lagged the market.
Fundamentally, things seem to be going very well. In the most recent quarter, the company grew sales by 67% and are up 66% YTD. Perhaps more importantly, its active local business accounts more than doubled from a year ago. The company guided for 2012 sales of $135-136mm, which represents 62-63% growth. This was an increase from prior guidance of $128-132mm. Additionally, the company had been forecasting breakeven adjusted EBITDA but raised it to $2-3mm.
In a stock like this, sales are likely the key metric, and growth investors likely look out a bit. Here is how the forward sales estimates have improved since the IPO:
While I wish I had looked into this company earlier, I have reviewed the SEC filings and think that this move may just be starting. My views are obviously preliminary, and I look forward to learning more about this dynamic company, but it seems to me that the shorts (3.2mm shares) are quite wrong here. The future is getting brighter.
YELP is a platform that connects consumers and local businesses. The CEO, Jeremy Stoppelman, is a co-founder who has been with the company since 2004. He was VP of Engineering at PayPal and worked briefly at Excite@Home. He has built a senior team that has been in place for five years, with the exception of the CFO, Rob Krolik, who joined last summer from Move, with previous experience at eBay. COO Geoff Donaker, who joined as VP, Business Development in 2005 also worked at eBay.
For all the reasons everyone seems to hate Facebook, it seems like they should like YELP. The company has been pursuing a mobile strategy since 2006, and it works on all the smartphone platforms, including Apple's (AAPL) iOS. Google (GOOG) can't say that. Plus, the insiders are committed. In fact, not one share was sold by any insider at the time of the IPO. All 8.2mm of the shares were primary, with the exception of 50K sold by the Yelp Foundation. Bessemer and Elevation own about 22% each, while Benchmark owns almost 16%. Director Max Levchin is the largest individual holder at over 13%, and CEO Stoppelman owns almost 11%.
I have to profess that I don't typically focus on such high-growth (and high valuation) companies. In my Top 20 Model Portfolio, 20 PE is quite high for any individual name. Still, I do look at companies that are less mature and that require something besides PE, such as Enterprise Value to Sales or Price to Sales. I wrote about Mako Surgical (MAKO) during the summer, suggesting a great potential opportunity, and ended up adding it to the model. My target there is based on sales.
Clearly, valuation is the $64K question for YELP, even if you think that the outlook is strong fundamentally. With this in mind, here is how YELP compares to some other very high-growth companies:
While this is no definitive valuation call, YELP looks at least in the ballpark. These are all rapidly growing, high gross margin stories. I wanted to include Palo Alto Networks (PANW), as it would add to my point, but they haven't reported yet. I wrote about PANW after its IPO, suggesting that it could be subject to selling pressure after the lock-up period ends in January.
So, if you, like me, find the YELP story interesting, I think that improving fundamentals (as evidenced by rising sales estimates), the valuation and the chart all lead to the conclusion that it's worth investigating further.
Additional disclosure: The author is long MAKO in one or more model portfolios at InvestByModel.com.