$YELP Q3 Earnings Cheat Sheet

by Enis October 22, 2014 11:09 am • Commentary

Event:  YELP reports Q3 earnings today after the close.  The options market is implying about a 10.5% one day move, which is in line with the 4 qtr avg move of 10.5%, and below the 8 qtr avg move of 14%.

Sentiment:  Wall Street analysts are generally positive on YELP, with 24 buys, 11 holds, and 2 sells, with an average 12 month price target of around $89.  The stock has been rangebound over the past year (though a very wide range of $50 to $100), and is up 3.5% year-to-date.  Short interest is at 14%, relatively unchanged in the past 6 months.

Options Open Interest:  Total open interest is skewed towards puts over calls by a ratio of 1.35 to 1.  However, the past 1 month of activity has also been skewed towards calls by a ratio of 1.25 to 1.  The bulk of the open interest is concentrated in Jan15 and Jan16 (no shorter-dated maturity has an option with over 2k of open interest).  Even in Jan15, the open interest is evenly spread.  In Jan16, the 60 put and the 80 call have over 8k and 10k of open interest, respectively.

Price Action / Technicals:  YELP has lived up to its billing as a highly volatile name, moving back and forth rapidly over the past year.  However, the overall change has been negligible, as the stock is in the same place it was in last October:

YELP daily chart, courtesy of Bloomberg
YELP daily chart, courtesy of Bloomberg

In the short-term, the low from last week of $61.90 is the spot to watch on the downside, while the high from early September of $86.88 is the level to watch not he upside.  That’s an admittedly wide range, but the options are implying a $7.50 move on the event, so either level could be reached this week on a big move.

Volatility:  Implied volatility in YELP has actually declined quickly in the past week as the stock has bounced:

YELP 30 day implied volatility, courtesy of Bloomberg
YELP 30 day implied volatility, courtesy of Bloomberg

Interestingly, options traders are putting less emphasis on earnings this quarter, as implied vol is lower than it has been in the past 5 quarters ahead of earnings.

Our View:  YELP is the ultimate speculative stock.  It is trading at 70x its 2016 earnings estimates, and at a market cap of $5 billion today.  Investors have been attracted by revenue growth of over 50% over the past 3 years, which is expected to translate into significant earnings a few years from now.

We generally avoid stocks like YELP, especially in the internet space, where competition is fierce and a protective moat is hard to find.  The stock has held up well since the Mar/Apr selloff, but this is a sentiment stock first and foremost.  Options look to be priced fairly, and the stock is near the middle of its recent range, so nothing to do for us on this one.