Typical Yelp

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About: Yelp (YELP), Includes: FB, GOOG, GOOGL, GRUB
by: Stone Fox Capital
Summary

Yelp slumps 30% on a typical sales hiccup.

The consumer review site saw key metrics grow about 20% YoY.

The stock has historically rebounded following these quarterly problems as the stock bounces off trough P/S multiples.

Yelp (YELP) never seems to fail to rip failure out of the hands of success. The consumer review site always follows strong quarters with unexpected issues. The stock has historically been a buy on these dips as the key consumer metrics constantly expand in the 20% range.

Image Source: Yelp website

History Of Failures

Anybody following the company knows that Yelp has a history of salesforce execution-related failures. The key metrics of consumer reviews, paying advertiser accounts and app unique devices consistently grows in the 20% range. The fact that sales have periods of weakness followed by a burst back to normal growth levels is a sign of operational issues, not competitive threats from Google (NASDAQ:GOOGL) (GOOG) or Facebook (FB).

During Q3, all of the above-mentioned key metrics grew by about 20%. The major hiccup is that paying advertiser accounts were flat with Q2 as a bunch of new accounts cancelled.

Source: Yelp Q3'18 shareholder letter

The company suggested a whole litany of issues causing the revenue miss and weak guidance. The question for investors is whether one trusts that these issues broken out in the shareholder letter are solvable. The market is suggesting the answer is no with the 30% decline in the stock.

  • lower-than-planned sales headcount
  • adjustments to sales promotions
  • now-resolved technical issue in our lead assignment system
  • lower success rate in reaching key decision makers in outbound sales calls.

A lot of these issues question why Yelp allows simple problems to impact results to the point they aren't addressed soon enough to prevent a large impact to numbers. One only has to look at this 3-year chart to see a history of problems.

Chart YELP data by YCharts

Back in early 2016, the stock plunged as slow user growth was questioned. The company was able to eventually move the business toward the mobile app where the consumer review site was no longer reliant on search traffic from Google.

Back in early 2017, Yelp slipped again as revenue guidance missed estimates. This time the market panicked due to another issue with sales performance.

Back in mid-2018, the stock again slipped due to some market confusion surrounding financial metrics after the sale of Eat24 to GrubHub (GRUB).

Clearly, the company has an execution issue in relation to what the market expects. The key to the above problems is that the stock eventually headed higher after each failed quarter result with a trend of higher highs.

Key Metrics Remain Strong

The key is that the operational metrics remained strong while the company is a cash flow machine. Yelp might've missed Q3 revenue metrics, but the company beat EPS estimates and grew EBITDA to $50 million. The company has generated $119 million in cash flows from operations YTD and ended the period with $837 million in the bank.

These metrics suggest a very healthy company. Looking at the long-term revenue trends confirms how the market overreacts to short-term issues in the sales funnel. Over the last 5 years, Yelp has consistently grown revenues while the stock has fluctuated wildly. Even the stock gains off the 2016 lows have been completely due to the revenue growth with the EV/S multiple still trading at trough levels of about 3x.

Chart YELP data by YCharts

The recent weakness is even more evident as the key EV/S '19 multiple is at only 1.7x. This assumes '19 revenues reach $1.1 billion, down from current estimates around $1.13 billion.

Takeaway

The key investor takeaway is that Yelp typically runs into these quarterly issues. As long as investors focus on key user metrics, the stock ultimately rebounds as the company is able to refocus the business and return in the next few quarters with solid results. The stock weakness is likely to persist for a while, but Yelp is an obvious bargain below $30.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Disclosure: I am/we are long YELP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.