Yelp released its first quarter earnings report more than a week ago, and the results were very disappointing. Shares plunged following the April 29 report but then rallied after Bloomberg reported that the company was seeking a buyer.
The stock has begun to decline today, however, following one firm’s dramatic downgrade and a broad spectrum of potential values placed on Yelp’s head if a suitor can be found. The same firm that cut their price target for Yelp in half suggested that Apple should buy Yelp.
Yelp downgraded, price target slashed
In a report dated May 11, analyst Nathan Yates with Forward View Consulting said he downgraded Yelp from Hold to Underperform and slashed his price target nearly in half following the company’s earnings report. His new target is $34 per share, compared to his previous target of $69 per share.
On the plus side, he noted that Yelp’s Local ad business is still growing, which is important because Local advertising provides more than 80% of the company’s overall revenue. The number of Local accounts increased about 43% compared to last year, climbing to about 90,000. He also said the company has been making a solid transition to mobile, as the number of mobile users climbed 29% from last year while the number of desktop users fell 3%.
On the bad side, Yates pointed out that Yelp has yet to develop an international footprint, as it recorded only $3.2 million in international revenue. International usage growth is also slow even though Yelp’s service is offered in 29 countries outside the U.S. He had been expecting better international results, as Yelp monetizes seven countries not counting the U.S.
Another negative was the small 8% growth rate in unique visitors. He added that he has anecdotal evidence from an “unscientific survey” which indicates that people over the age of 35 are not aware of Yelp’s brand and, in fact, don’t even know the company exists.
Why Yelp earned a downgrade
He listed three main reasons for his downgrade. First, he called Yelp’s first quarter earnings “unimpressive” and noted that the company’s guidance was also weak. Second, his previous forecast had been based on “the assumption that Yelp’s growth rate would improve,” but it didn’t.
Third, he brought up the reports that Yelp was looking for a buyer, but he wasn’t expecting a deal in the near term. Going forward, he sees a 75% likelihood that Yelp will be bought out and a 25% likelihood that there is no deal and that Yelp shares will decline to the mid-$30 range. Seems a bit backwards perhaps, but the analyst said his $34 per share valuation on Yelp is for its “independent business” and not the potential buyout price.
Yelp worth $55 to $65 a share: analysts
If Yelp does manage to sell itself, Yates sees a price of about $55 per share, adding that anything over $60 per share “would seem rather rich.”
However, Sterne Agee CRT analysts Arvind Bhatia and Brett Strauser see a higher buyout price for Yelp of between $60 and $65 per share. They think Yelp management is more motivated to sell the company because of its recent slowdown and the recent pullback in its share price. Deutsche Bank analysts offered an even wider range of between $59 and $85 per share
The main reason most give as to why a company might buy Yelp is because of its relative success in the Local ad business. The Sterne Agee CRT team called Local “a difficult nut to crack,” saying, “Yelp is one of the few companies that has had significant success in this segment and currently has 142 million users, 2.2 million merchants and more than 90,000 advertisers.
Apple should buy Yelp
Firms which have released commentary on the Yelp buyout rumor have generally circulated the same list of names, with each firm giving higher probabilities to one or more of the companies on the list. Deutsche Bank analysts see Facebook as being the most likely buyer, while Jefferies likes Google better and UBS thinks Amazon and TripAdvisor are more likely to gobble up Yelp. Other candidates several firms have mentioned are Yahoo, Google and Priceline.
Yates thinks Yahoo is the most likely buyer with Google being in second place. However, he bucks the trend in suggesting that Apple should buy Yelp. He argues that the two companies have cultures and markets that “align perfectly.” He calls for Apple CEO to, “Open up your silo of money!” offering to “suggest multiple ‘Yelpple’ synergy opportunities. In particular, he thinks, “Siri might be particularly fun again with a Yelp integration.”
As of this writing, shares of Yelp were down 2.44% to $48.71 per share.
