Alex Cho
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Hold Back on Yelp: Upside Seems Fully Priced In

Okay guys, so the consensus view on Yelp is that the company will report some margin compression and perhaps some q/q weakness to revenue in response to declining promotional activity from Q1’16. Notwithstanding those changes in strategic fundamentals the expectations were set quite low, and it’s not yet clear if management was intentionally lowering expectations ahead of LAA (local advertising account) ramp, which would make the management guidance a little less reliable, but then again the CFO probably knows best.

I still like Yelp, but I think it’s reached fair value in the past couple quarters as the market seems to have priced in fundamental strength in response to various advertising initiatives, adjacent application opportunities, and engagement growth in the form of incremental Yelp reviews.

When looking through the earnings preview report from Mark Mahaney at RBC Capital Markets (he has one of the best track records among all sell side analysts), I get the feeling that his intuition is correct. Pretty much the graphic from the report more or less captures the fact that the consensus is anticipating Yelp to report at the high-end of the guidance range. Since the consensus is already anticipating substantial revenue growth of 26.8% y/y in Q2’16.

Perhaps a slight beat is attainable, but a substantial earnings surprise is unlikely to carry through from Q1’16 into the remaining quarters of the year. Even if revenue was 1H’16 loaded, I think markets have finally stabilized around a conclusion that we need another meaningful catalyst. And while Yelp is in a substantial capital deployment phase by adding additional sales staff to help convert local businesses into lucrative advertising accounts, I’d be hesitant to rely too heavily on the investment fueled growth comps until we reach the next fiscal year.

Yelp needs to flesh out some of its other growth opportunities in some of its more infant businesses and develop significant ad-unit pricing growth to drive q/q gains above trend. Since the local businesses are in the early adoption phase of Yelp’s digital ad products, I’d be hesitant to anticipate a substantial improvement in y/y comps to ad inventory pricing. Furthermore, investors who missed out on the opportunity would be better off looking for more compelling opportunities elsewhere until a more meaningful catalyst emerges or the value reverts below the mean average.

I think Yelp is a great investment over the long-term, but still. I’d be looking at other names in the Internet space in the meantime.