A Green Light in $YELP?

by Dan May 5, 2016 11:21 am • Commentary• Trade Ideas

Event: Yelp Inc (YELP) reports Q1 results tonight after the close.  The options market is implying about a 14% one day move, which is essentially in-line with the average one day move following the last 4 earnings reports. Of the last 4 reports, their were 2 one day declines that averaged 24%.

To put the implied move in some context, the May 6th weekly 21.50 straddle (the call premium + the put premium) is offered at $3 vs the stock at $21.50. If you bought that, and thus the implied move, you would need a move above $24.50, or below $18.50 just to break-even by tomorrow’s close.  For a company with an enterprise value of $1.28 billion, the one day move tomorrow is suggesting that the value of the company could rise or fall by close to $200 million!  

Price Action / Technicals: Shares of YELP are down a whopping 25% year to date, down 58% from its 52 week highs, and down 80% from its all time highs made in early 2014. That some serious 2000-2002 web 1.0 cash price action. Maybe even more remarkable is that the stock is actually up 50% from its 52 week lows made in February, but you don’t need a degree in math to know that the loss of billions of dollars in market cap from the highs is just a tad more significant than a bounce off of multi-year lows worth a few hundred million dollars.

The one year chart below shows the stock’s recent stabilization in and around $20, but with little support until the mid teens, with no overhead resistance until the mid to high $20s:

[caption id="attachment_63418" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Sentiment: Wall Street analysts are fairly mixed on the stock, with 12 Buy ratings, 23 Holds and 3 Sells and an average 12 month price target of about $22.50, about $1 from where the stock is trading.  Short interest sits at 13% of the shares outstanding, which is astounding when you consider how much the stock is down.

Valuation / Balance Sheet:

Also surprising when you consider that while the company loses money on a GAAP basis (had negative $12.5 million in net income on $550 million in sales in 2015), sales have been growing at a healthy clip, close to 60% a year since their 2011 IPO, but that growth is decelerating to the expected 26% this year and next.

YELP has a very clean balance sheet, with 23% of their $1.6 billion market cap in cash, no debt, and minimal year over year cash burn.  So I can see how the stock appears cheap-ish.

But don’t take my word for it, I’ve just spent an hour looking at the stock, other have spent more time on it. The stock caught a bid this week as hedge fund firm Greenlight Capital took a small stake in the stock:

It appears that Greenlight thinks the stock is undervalued and could be sold at a signification premium if the board chose too. But I will add that putting a for sale sign on your company in this space has not been a great idea recently, just ask the guys at Pandora.

My Take into the Print: I suspect some of the forces pressuring ad revenues at Google and Twitter, (namely Facebook) have taken their toll on YELP in 2016 as well.  I’d be very surprised to see a beat and raise when you consider the other commentary in the space of late. That said, it would take a meaningful guide down, in my opinion, for the stock to be down more than 20%. With Greenlight involved, and Maverick Capital (the number two shareholder materially raised their stake in Q4) I suspect sooner or later YELP is in play, putting a floor in the stock in the mid teens.

I see little reason to play the stock before earnings, and for those who think the stock is cheap, sentiment poor, short interest high, and the possibility for a $30 plus stock at some point in the back half of 2016, then you might want to consider risk reversals, selling downside puts too own upside calls or call spreads.

For instance with the stock at $21.50, you could sell the November 15 put (very near the 52 week low of $14.53) at $1 and use the proceeds to buy the November 25 / 35 call spread for about $2. That structure would cost you about $1, so between $15 and $26 on November expiration you would lose up to $1, or about 4.5% of the stock price. Best case is gains of up to $9 between $26 and $35 with max gain of $9 above.  The worst case scenario is that the stock is below $15 and you would be put the stock there ($16 when you add the cost of the trade), and then have losses one for one with the stock below. What a trade structure like this does is it defines your risk to the downside, but offers leverage to the upside, with minimal risk ($1) amidst a very wide range in the stock. It covers a considerable amount of time for positive events to evolve.

Again I see little reason to get involved on the long side before the print. I would not press a short like this, but might consider a similar long biased structure if the company were to guide lower and the stock was in the high teens.