Is Yelp..all bark and no bite.
I was amazed to watch the price of Yelp (NASDAQ:YELP) stock rise approximately 20% from its lows on Monday, based apparently on an upgrade from JP Morgan analyst Kaizad Golta and a follow-up plug from Jim Cramer on Mad Money. I decided to do a little investigative reporting into the historical relationship between these two gentlemen and Yelp.
First I searched for previous upgrades on Yelp by Mr. Golta over the past year. In December of 2012 he placed a price of $19.00 a share and a neutral rating on the stock stating.
"Yelp shares trade at 27x our 2014E EBITDA and 4x 2014E revenue, a premium to most high-growth, early-stage Internet names including LinkedIn, which trades at 24x 2014E EBITDA. Our estimates already call for 40% revenue growth over 2012- 15 with significant EBITDA margin expansion - 3% in 2012 to 20% in 2015.
In August Mr. Golta raised Yelp from Neutral to Overweight with the following comments.
"Kaizad Gotla of J.P. Morgan has raised his rating on the shares to Overweight from Neutral, and also the price target from $32 to $52. He writes that the company still thinks more rise in its shares regardless of the sharp change in the shares overnight. He further writes that the speed of innovation in new advertising products is increasing and the company is making good growth towards closing the room for advertisers. He is now less worried about being fallen up by the reliance of company on Google Inc . Yelp nearly receives 50 % of its browser based traffic from Google."
Gotla raised his estimates to $226.7 million in revenue for 2013, $29.8 million in EBITDA, and 26 cents earning per share, up from the previous $221 million, $24 million, and 18 cents per share.
I would have you plat close attention to Mr. Golta's estimated revenue and earnings forecast for Yelp in 2013, because this week he raised his valuation to $89 based on the following.
"Analyst Kaizad Gotla said ad tracking suggests strong coverage in most geographies/verticals and may drive better-than-expected profitability. Checks also indicated strong adoption of Yelp Deals in 4Q".
So according to these releases Mr. Gotla, who at the beginning of the year valued Yelp at $ 19 a share an stated this was at a premium to most high growth, early stage Internet names, now a year later feels the company is worth 4 times that amount. This somewhat boggles the logical mind in that Yelp failed to meet Mr. Gotla's own targets for EBITDA and earnings per share for 2013 which he RAISED when he upgraded the stock in August.
As for Jim Cramer I looked back and on the May 9th episode of Mad Money he stated
"As for Yelp, Cramer said, "it has become, overnight, one of the most overpriced stocks in the book. Although it could breakout to remarkable profitability rather quickly, I think the nearly $2 billion market cap is already fair value."
Now less than nine months later Mr. Cramer is touting the stock as a buy with the following comment.
"And I think the opportunity to be the Yellow Pages to the world is worth more than the $5 billion Yelp is valued at now,"
Thus, as the company continued to lose money and not meet analyst expectations over the past nine months, Mr. Cramer has seen fit to almost triple is expected valuation of the company.
These two cheerleaders, for a lack of a better term, seemed to provide most of the bark for Yelp over the past week. I shall provide the bite, or lack thereof.
Price to book value is an absurd 27 to 1. If you dig deeper you find its price to tangible book value is 41 to 1. That's correct, Yelp has a tangible net worth of approximately $ 2 per share.
Company has yet to make a profit and there is no guarantee it will ever make a profit. The forward P/E is 294 to 1. Going out further to 2016 and taking the most optimistic analyst guess as to earnings Yelp would be trading at 41 to 1 expected earnings.
The revenue growth of the company is unsustainable for three reasons. First the company is established in the large US markets presently. These markets have companies that can afford the steep price that Yelp charges for advertising. As it moves to smaller markets I do not see the local mom and pop outfits spending $200 to $ 300 a month on advertising on Yelp. Secondly, as stated above Yelp charges about 1000x more than what Google and just about everyone else charges for advertising on their site. As Google, Facebook, Twitter etc. move forward to compete with Yelp, Yelp will either have to lower their prices or lose business. Finally with regards to expansion in other countries it has been shown that Yelp receives roughly a third of the revenue per customer their as opposed to the U.S.
The ruling by a Virginia court that Yelp must reveal its anonymous reviewers as they are subject to a defamation of character lawsuit brought on by a carpet cleaning service did not make much of a headline, but in my opinion could pose a problem for Yelp. Will people feel comfortable posting reviews online when they may be subject to litigation? Common sense tells me it will only be a matter of time until lawyers jump on this possibility.
Each month Yelp shareholders value decreases as the company issues stock in lieu of payments to its employees, which they almost always cash in immediately. Now this creates a twofold problem for the shareholder as the value of his holdings are diluted and at the same time he is paying the employee's salary. Sort of a double dip if you will.
In my opinion Yelp is about 20 years late to the dotcom bubble. It resembles all this companies from years past that analyst like Mr. Gotla and Mr. Cramer painted as the wave of the future only to see investor's wave goodbye to their money.
Bottom line Yelp has a lot of bark from analyst and television personalities but has no bite what so ever.