Yelp Inc Downgraded After Earnings Disappoint

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Yelp shares got killed today after last night’s disappointing earnings report, and the company has earned at least one downgrade (and probably more). Yelp stock plunged during regular trading hours today, falling as much as 28.35 to $24.01 per share.

No longer confident in Yelp

Yelp’s big problem in last night was its weak guidance, which clearly has caused investors to lose confidence in the online review platform. Indeed, earnings trends within the tech sector so far this reporting period have indicated that much of Wall Street’s reaction to reports has hinged on the strength of companies’ guides.

Recently there were rumors that Yelp was looking for a buyer, but nothing has materialized yet. In fact, it appears as if management abandoned their efforts to look for strategic alternatives during the second quarter. Among the suggestions of possible suitors were Apple and Facebook.

Deutsche Bank downgrades Yelp

Following last night’s earnings report, Deutsche Bank analyst Lloyd Walmsley and his team said they are now even less comfortable with their estimates, which were already below the consensus. In addition to downgrading Yelp from Buy to Hold, they also slashed their price target from $56 to $33 per share.

They started covering Yelp two years ago and listed seven reasons to be bullish on the stock. Most of those reasons haven’t materialized, however. The two areas in which Yelp is doing well are local vertical search and mobile, but the company has failed to perform well in the other areas. S&M leverage has been especially problematic for Yelp, which has also failed to increase the number of advertisers.

Further, they say that monetizing local online advertising has become more difficult than they previously thought it would be. Of course this can be fixed, but Yelp might have to change strategies, invest heavily in new ad products, and/ or cooperate with a player that already enjoys a large scale.

Is Yelp worth anything to a buyer?

As a result, the Deutsche Bank team is also no longer sure that Yelp has much strategic value for a potential buyer. The company’s salesforce continues to struggle and doesn’t show signs of sustainable improvements in efficiency. Yelp management attempted to restructure the salesforce during the first quarter but appears to have failed.

When it was reported that Yelp had backed away from pursuing a potential buyer, the analysts lost the safety net they had in terms of strategic value. In order to become more constructive on Yelp again, they need to see signs of sustainable improvements in Yelp’s salesforce and/ or more “innovation / relevancy on ad products.”

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