Is Yelp Stock Fully-Priced At $20?

After a 40% rise since the March lows of this year, at the current price of around $20 per share we believe Yelp’s stock (NYSE: YELP) has reached its near term potential. Yelp’s stock has largely underperformed the broader markets between fiscal 2017 and now. The retailer’s stock is around 52% lower than it was at the end of fiscal 2017, compared to 25% growth in the S&P. Our dashboard, What Factors Drove 52% Decline in Yelp’s Stock Between Fiscal 2017 and Now? provides the key numbers behind our thinking, and we explain more below.

A roughly 20% rise in Yelp’s revenues from $847 million in fiscal 2017 to almost $1 billion in fiscal 2019 was driven by growth in the sale of its advertising products. However, the company’s stock declined during this period largely due to a 78% decline in its net income margin. The combination of margins dropping substantially from 18.0% to 4.0%, with revenues growing modestly meant that earnings per share dropped from about $1.87 per share in 2017 to 55 cents per share in 2019. However, it should be noted that the company’s 2017 net income included a pre-tax gain of $164.8 million on the sale of Eat24. This resulted in cost savings and higher margins for the company in 2017. The contraction in Yelp’s net margins of 5.9% from 2018 to 4.0% in 2019 – was brought about by a higher cost of revenue, which as a percentage of revenue, grew slightly from 6.1% to 6.2% during this period.

Finally, Yelp’s P/E multiple expanded from around 22x in 2017 to about 63x in 2019. It appeared lower in 2017 as the reported increase in EPS led the P/E ratio to appear lower at that point. The company’s P/E is about 37x now, and it could remain rangebound going forward.

So how has Coronavirus impacted the stock?

In Q2, Yelp’s revenue fell by nearly one-third to $169 million, but was still better than the $153 million in sales that analysts were expecting. That translated into a net loss of $0.33 per share, also better than the $0.51 per share in losses that Wall Street was modeling . Adjusted EBITDA dropped 80% year-over -year to $11 million. Yelp did not give much specific financial guidance for Q3 beyond noting that operating expenses are expected to rise by $30 million.

Yelp’s business has been negatively impacted as a large number of local businesses and restaurants are struggling due to the pandemic. In fact, the company could see continued fluctuations in business openings and closures as communities respond to local outbreaks – until a vaccine is administered.

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