Was The Fall In Yelp’s Stock Post-Q3 Justified?

Yelp‘s (NYSE:YELP) stock fell by over 25% late last week after the company reported its third quarter earnings, with revenue coming in lower than the expected range. While the revenue miss was disappointing, we believe that the sell-off was overdone, as Yelp’s operational metrics were decent and its longer-term prognosis remains positive. Below we explain further.

Our interactive dashboard on Yelp’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

Other than the Q3 revenue coming in lower than the expected range by a million, most operational metrics saw growth:

• Advertising revenue: $233 million (+16% y-o-y)
• Total revenue: $241 million ($1 million below the guided range of $242-246 million)
• App unique devices: +13% y-o-y
• Paying advertiser accounts: +25% y-o-y
• Cumulative reviews: +20% y-o-y

The company’s management attributed slower revenue growth to slower-than-expected growth in its sales force, promotional changes and other sales-related factors. If this was indeed the case, there is reason for optimism about a sales growth turnaround in the near term. In addition to the growth in operational metrics, Yelp’s management also stated that the company has not seen losses due to any competitive pressures.

While the shift from term contracts to non-terms contracts was expected to have some impact on the predictability of business, the downward revision of the annual revenue guidance from $952-957 million to $938-942 million is likely to have further spooked the markets. The lower revenue guidance for Q4 stems from management’s focus on slowing sales headcount growth from 20%+ to levels more amenable to margins in the longer term.

We see this fall as giving the company’s stock further upside, with Yelp’s history of bouncing back from similar falls in the past. What also gives confidence to our thesis is the growing user count, as Yelp has been able to manage demand quite well. Given the holidays in Q4, Yelp could end up surprising the markets on the revenue front.

Do not agree with our forecast? Create your own price forecast for the Yelp by changing the base inputs (blue dots) on our interactive dashboard.