YELP Stock Still Overvalued – Nobody Will Acquire This Dog

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Yelp Inc. (YELP) went public in early 2012 to great fanfare. The online review site had a cult appeal, known for both making and breaking local restaurants, and YELP stock moved sideways for a while until a breakout 2013 saw shares roughly triple.

yelp inc 120 logo

Then, in early 2014, shares climbed even higher to start the year — with YELP stock hitting almost $100 per share, up almost seven-fold from its offer price of $15 per share and more than quadruple the roughly $25 per share it traded at immediately after its IPO.

Things have looked a bit more grim since then. Shares of YELP stock are now below $50 per share after continued profit struggles and sales disappointments in recent quarters, most notably a big Yelp earnings miss about a month ago.

Some traders see this recent downtrend as a buying opportunity. In fact, after Yelp Inc. gapped down to a 52-week low under $38 on its ugly earnings, it soared right back up to around $50 on hopes of a buyout — with word that Goldman Sachs (GS) was helping in the acquisition hunt.

But let’s face it: Yelp doesn’t have a very attractive balance sheet, and it hardly has a wide moat that would protect it from competitors. While it’s always possible that an internet company like Yahoo! Inc. (YHOO) or Google Inc. (GOOG) would purchase the company, only an act of desperation would lead either to tangle with YELP stock right now.

Yelp Stock Struggles Locally

The important thing to remember here is that Yelp, while a big publicly traded company valued at $3.4 billion, is very much local in focus. Consider that in Q1, Yelp reported a total of $118.5 million in revenue. Of that, $98.5 million or 83% came from local advertising accounts.

But there are some fundamental problems with this business model. Namely, local restaurants and repair shops don’t have infinite ad budgets, so YELP stock is focused on a core customer with a low ceiling. That’s not good for long-term growth.

Similarly, those local businesses have a host of other outlets to advertise on — like online advertising heavyweights Google Inc (GOOG) and Facebook Inc (FB), both of which allow for very sophisticated targeting by geography that can help local businesses.

Google and Facebook also offer a simply mammoth scale, while Yelp user growth is more modest — and slowing. In fact, total monthly visitors to Yelp.com via desktop or via the mobile app grew just 8% year-over-year, to approximately 142 million. That’s also up only about 5% from the user tally in the previous quarter.

Now consider that YELP stock is barely a break-even company now, with a projected EPS of just 13 cents this year and 50 in FY2016 — not leaving a lot of room for investment in itself and growth. But somehow Wall Street hasn’t adjusted expectations — giving YELP stock a forward price-to-earnings of roughly 90!

YELP Buyout Rumor is Just a Rumor

When you look at all these metrics, you have to wonder who would pay a premium above and beyond the currently inflated valuation.

I mean, there is likely some benefit from YELP — how could there not be any? — but the commensurate value of buying this company at around $4 billion after a mandatory premium on shares may not add up to much. Remember, YELP is barely break-even so there would have to be some massive benefit associated with the scale of the buyer, and even if exposure spiked there is no guarantee that it won’t keep facing pressure from competitors like HomeAdvisor, Angie’s List (ANGI) and Urban Spoon.

Online advertising is a very difficult game, and local online advertising even more so. Yelp has done a good job building out its business to what it is, but there may not be a lot of potential left.

That leaves it a rather unattractive buyout target.

But that doesn’t mean a Yelp buyout is impossible. Yahoo! has made a number of hare-brained buyouts in recent memory, including news aggregator Summly and mostly ad-free blogging platform Tumblr that have yet to drive any bottom line impact.

So sure, Yelp Inc. could be another target for flailing tech giant YHOO … but banking on an ill-advised acquisition from an internet company that doesn’t know better is a poor reason to bargain hunt in YELP stock here.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/yelp-stock-still-overvalued/.

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