Yelp Inc (YELP) Stock Upgraded By Morgan Stanley

Yelp Inc (YELP) Stock Upgraded By Morgan Stanley
By User:ZyMOS [Public domain], via Wikimedia Commons

Yelp Inc (NYSE:YELP) is one of the more interesting web companies out there today. The firm operates in an industry that might be of major importance in the years to come, and its managed to convince investors of its potential. It’s also suffered a close to 20% loss in value this year as momentum stock got crushed by a nervous market.

Morgan Stanley (NYSE:MS) reckons that Yelp Inc (NYSE:YELP) is headed for a bright future and recommends that investors Buy the stock. A team of analysts led by Jordan Monahan published a report on the firm and competitors this morning and put a price target of $69 on the stock. Analysts also upgraded the stock to Overweight. The report warned of a 30% upside to that target should things go the company’s way.

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Yelp growth may surprise investors

Yelp Inc (NYSE:YELP) has a huge upside stemming from “competitive positioning, consistent execution, and predictable subscription-based revenue stream” according to the report. The analysts vies the company’s stock as offering a favorable risk/reward given its recent fall in price, and the 30% upside stems from the company’s impressive business and positive growth prospects.

It is the subscription service that seems to be of prime importance to the Morgan Stanley analysts. They reckon that the revenue growth from that offering, and the participation rate, which hit 4.6% in the company’s most recent earnings report, show that business has potential going forward.

Even more promising are the “significant opportunities for Yelp to expand into new revenue products as it seeks to capture a greater share of the offline transactions it enables” pointed out by the Morgan Stanley analysts. Yelp Inc (NYSE:YELP) may be able to do more than work on its standard advertising business and increase subscriptions, it may be able to convince firms that its service is valuable enough to pay for in different ways.

Facebook and Google remain a problem

The big downside risk for Yelp Inc (NYSE:YELP) is, according to the Morgan Stanley report, the entrance of a big player into the local deals market. Unfortunately if Yelp is successful in pulling profit at a high margin out of the business, it is likely to attract in big firms looking for a presence. Yelp shareholders have often speculated about an acquisition in the area, but competition may be more likely given Yelp’s valuation.

Accoridng to today’s report “Competitive local product offerings from Facebook Inc (NASDAQ:FB) or Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) could see SMB local online ad dollar spend shifts that could slow Yelp’s ability to grow its business participation rate.” If Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) reckons there’s something important in Yelp business it’s almost guaranteed to jump in. The firm is operating on many other technologies that have less chance of success, and certainly fall further outside its expertise.

Novel success is, for businesses generally and Yelp Inc (NYSE:YELP) specifically, a two-edged sword. Showing off the winnings of a new market attracts the attention of other firms, and often does damage to the outsized profits expected in a new business. Investors will be watching for any sign of interference by a big player in the local ad market. A 30% upside is unlikely for Yelp with Google competition on the way.

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