Yelp (YELP), the noted consumer feedback site, has faced some hard times despite also having some good news to share.
YELP stock — which once traded at nearly $100 per share — has pulled back to below $50, and has been rumored to be a likely takeover target.
And considering there are a host of likely bidders, it might pay to be bullish on Yelp despite its warts.
Yelp and the M&A Train
Despite the sagging stock price, Yelp’s revenue has been on the upswing. First-quarter earnings from this year came in at $118 million, or 55% higher than the year-ago period, while Q4 2014 earnings also were up about 56% year-over-year.
Moreover, Yelp is been scoring with mobile users — a good sign for a site that wants to grow. During the fourth quarter 2014, for example, it attracted 72 million unique mobile visitors, and about 58% of its reviews were posted via mobile devices. Monthly uniques jumped again in Q1, by 29% to 79 million. (Reflecting overall desktop trends, desktop users did dip in Q1, by 3% to 80 million.)
Naturally, a competitor looking to increase its audience and attract mobile users might be targeting Yelp.
Yelp also posted its first profits in Q4 2014. Like many tech companies, Yelp invests in marketing and building an audience, with profits expected to come sometime down the road. Well, Yelp hit that road, earning $32.7 million compared to a year-ago loss of $2.1 million.
There were some bumps in Yelp’s past two earnings reports — a slowdown in revenues in Q4 followed by a larger-than-expected loss in Q1 has hampered YELP stock. Shares are down some 17% year-to-date — and that’s including a rebound on recent takeover rumors.
Of course, that’s what sometimes happens when companies’ shares take a hit — merger and acquisition activity picks up speed. Just like investors buy the dips in shares, competitors often swoop in when a company is sagging.
The Potential Bidders
Yelp’s market capitalization is a mere $3.4 billion. While some companies would balk at investing $3 billion-plus on Yelp, others like Google (GOOG, GOOGL), which is sitting on $65 billion of cash, or even Facebook (FB) and its $12 billion in cash wouldn’t have a hard time swallowing the world’s allotment of YELP stock.
In the past, Google battled with Yelp over search results. Yelp, in fact, accused it of stacking the deck and favoring its own Google consumer feedback, giving Google the edge. Some analysts have cited this “bad blood” as one reason why Google wouldn’t acquire it. But Google is after market share and profits and doesn’t usually get swayed by business rivalries.
Facebook is increasingly trying to appeal to small businesses, and buying Yelp could boost its appeal to that market.
Those aren’t the only companies that might try to nab Yelp. Apple (AAPL) or Amazon (AMZN) could swoop in and pony up $3.5 billion plus a premium with ease. Yelp would fit right into the latter’s Amazon Local business and strengthen it.
Priceline (PCLN) which already snapped up OpenTable, could look to strengthen its reach. With a market cap of $61.7 billion and a rising stock price of $1,191 a share, it could be looking to extend market share and move into consumer feedback, not just restaurant reservations. However, it may not have enough cash on hand to finance a purchase of Yelp and may be reluctant to be weighed down by too much debt.
Smaller firms could also enter any M&A bidding, too. GrubHub (GRUB) has to be considered a long shot since its market cap of $3.3 billion is equivalent to Yelp’s. It would have to offer stock in the deal to alleviate taking on any excessive debt. But adding Yelp’s consumer focus to GrubHub’s food enthusiasts would be a perfect marriage if the numbers worked out favorably.
The big tech stock to ignore in all this is Yahoo (YHOO). With only $6 billion cash on hand, YHOO might be reluctant to spend the approximately $3.5 billion plus, to acquire it.
For investors looking to snap up a stock that may be on the acquisition block, Yelp is a buy. Its reasonable market cap qualifies it as a likely candidate to be acquired.
And those premiums when acquired often boost its current stock price by about 20%.
As of this writing, Gary Stern did not hold a position in any of the aforementioned securities.
