A Cry for $YELP

by Dan April 29, 2015 2:01 pm • Commentary

Event: YELP reports Q1 results after the close. The options market is implying about a 12% one day move which is shy of the 4 qtr avg move of about 15% (the last three have all been lower by an avg of 17%).  The weekly at the money straddle is offered at about $6 with the stock at $50.50, if you bought that, and thus buying the move you would need a rally above $56.50, or below $53.50 to make money by Friday’s close.

Expectations: RBC Internet Analyst Mark Mahaney, who rates the stock a Buy with a 12 month price target of $82, outlines his items to focus on into the print in a note to clients:

1. Local Ad Accounts – YELP grew Local Advertising Accounts 54% Y/Y in Q4:14 to roughly 84k and we forecast 8k net new adds in Q1 (vs. 9.1k in Q1:14).

2. Local Ad Revenue – Yelp’s largest revenue line grew 60% Y/Y in Q4:14 to reach $93MM. We are forecasting some deceleration on a 4pt easier comp, with 53% growth in Q1:15 ($100MM).

3. Unique Visitors – Yelp’s self-reported Unique Visitors decelerated in Q4:14, growing 13% Y/Y to reach 135MM. We are forecasting modest deceleration – 11% Y/Y growth in Q1.

4. EBITDA – We are estimating $21MM in EBITDA in Q1, or a reasonably robust
17% EBITDA margin.

5. Mobile Datapoints – During Q4, average monthly Mobile unique visitors grew 37% Y/Y to approximately 72MM. Mobile constituted about 65% of Yelp Searches in Q4, up from 64% in Q3.

Price Action / Technicals:  The stock is down 8% on the year, and about 50% from the all time highs made in March 2014.  The 5 year chart below shows the fairly epic break below the neckline of a classic head and shoulders top:

YELP 3yr chart from Bloomberg
YELP 3yr chart from Bloomberg

$60 looks like a technical resistance level that in the near term will only be breached on some sort of m&a chatter.

My View: The stock trades 6.5x expected 2015 sales of $575 million, which would represent 53% yoy growth. Not bad, but a meaningful deceleration from the 65% avg over the last three years.  In comparison Pandora (P) who has essentially the same market cap at $3.8 billion trades at 3.3x expected sales of $1.2 billion growing at 30%.  Both companies face massive competition from behemoths like Google and Apple, but if we were playing would you rather, I find Pandaora’s biz a lot more interesting, and a lot cheaper asset for a larger player to digest.  I think Yelp overrated and Google is a formidable competitor that could crush them. But as a featured resource in Apple Maps I think its safe to say that Apple has a vested interest in keeping YELP afloat.

A miss coupled with downbeat guidance and the stock is back int he mid $40s in line with implied move, a really bad guide and the stock re-tests last Feb’s 52 week lows post earnings in the low $40s.

The stock has 15% short interest, and while not exactly cheap, it could be viewed as a strategic asset, so a decent report and guidance could have some considering potential acquirers. I am not in that camp, and expect to see new lows in the coming weeks.

Trade Ideas: to play for a similar breakdown to WYNN you have to take an unholy amount of risk.  For instance the May 1st weekly 50/42.50 put spread (stock reference $$50.85) is offered at about $2.30, with a break-even at $47.70, down 6%, with a max gain of $5.20 down 16% in line with the avg move over the last 3 qtrs, and also at the Feb low.

As we often say, long premium directional trades into an expected volatile event can be a tough way to make a living as you need to get a lot of things right, most importantly direction and magnitude of the move.  Without a ton of conviction a trade like this could make you look a tad silly even if you get direction right but only a slight move, let alone a gap in the wrong direction.