Yelp Inc (YELP) had quite an interesting day on Monday. Yelp stock began the day with steep losses, then spiked midday, only to sell off again and finish with an 11% loss.
The online reviews site announced fourth-quarter earnings yesterday, and it actually put in a pretty solid quarter: Yelp managed to top revenue expectations, and also guided for higher-than-expected revenue in Q1 2016.
So why did YELP stock plunge on Monday, and where does it stand going forward?
Well, the precipitous drop came from a combination of factors: Earnings failed to impress, the CFO randomly resigned and analysts slashed their price targets.
When taken in total, yesterday’s developments understandably raise some eyebrows, and despite YELP stock’s 66% losses over the last year, I still think shares are best avoided.
New Questions for YELP Stock
The biggest blow was the announcement that CFO Rob Krolik will be leaving the company, apparently apropos of nothing. “After almost five years with Yelp, I am ready to take some time off to spend more time with family, but expect us to seamlessly transition to a new chief financial officer in the meantime,” Krolik said.
So why’d the markets take this as such a curveball for YELP stock? Well, first of all, due to a mix-up with PR Newswire, the earnings release was actually released a full three hours before markets closed. And while shares initially jumped on the release, Wall Street tends to disapprove of unexpected CFO departures.
Aside from an unexpected CEO departure, an abrupt CFO exit is probably the biggest red flag a company can give. Rightly or wrongly, investors assume that the CFO is trying to duck out ahead of some bad news or before wacky accounting issues come to light.
Not that YELP stock would need funky accounting to look unattractive. While revenue is growing quite well — Q4 revenue of $153.7 million was up 40% year-over-year, topping expectations for $152.5 million — earnings were unimpressive. GAAP EPS of -29 cents missed the Zacks consensus of 66 cents by a mile, and even adjusted EPS of 11 cents per share didn’t stack up to the 12 cents Capital IQ analysts expected.
YELP stock also suffered due to its first-quarter projections for earnings before interest, taxes, depreciation and amortization (EBITDA), which the company expects to come in between $10 million and $12 million. That’s down from the same period a year ago, when Yelp EBITDA clocked in at $16.3 million. Heavy marketing spend will drag that figure down this quarter, said outgoing CFO Krolik.
Adding insult to injury, a number of Wall Street analysts slashed their price targets on YELP stock. Susquehanna cut its price target to $20 from $22, while Axiom Capital, Needham and RBC Capital Markets all cut their targets as well.
The bottom line? It doesn’t matter that YELP is growing revenues rapidly. As we’ve seen with Twitter Inc (TWTR), investors are increasingly earnings-focused (go figure!), wanting to see some actual profits, not just rapid revenue growth.
Given the early 2016 turmoil, I don’t see that changing anytime soon.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
