Yelp Inc (YELP): Boosting the Bull Case for an Underperforming Name

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Yelp Inc (YELP) has been a big disappointment since it went public four years ago, but a Wall Street upgrade Monday might just indicate that YELP stock is finally on track for market outperformance.

Yelp Inc (YELP): Boosting the Bull Case for an Underperforming Name

Deutsche Bank upgraded shares to buy from hold, while raising its target price to $33 from $26. The new target implies upside of more than 15% in the next year or so. The good news led shares to jump as much as 6.3% at one point early in the session.

Analyst Lloyd Walmsley cited increased confidence in the company’s new financial team and productivity gains. From the note to clients:

“We upgrade shares of Yelp from Hold to Buy and increase our TP from $26 to $33, reflecting stabilized salesforce productivity, more confidence in management, and improvements in ad units and systems bolstering our longterm outlook … Beyond 2016, challenges remain, but we prefer to be long the shares for upside this year and better long-term optionality given increased confidence that new financial leadership at Yelp can help drive product and monetization innovation in 2017 and beyond.”

This is just what shareholders want to hear after a protracted period of lackluster results. Indeed, Yelp has missed Wall Street’s earnings estimates for six consecutive quarters, according to surveys by Thomson Reuters.

It’s also worrisome that it managed to do so, even as revenue delivered a string of upside surprises.

Help for the YELP Stock Price

Deutsche Bank’s upgrade comes at a time when market sentiment is improving on the name. Perhaps that can keep its amazing momentum on track. The YELP stock price has underperformed the S&P 500 by a wide margin since its day-one closing price.

Even worse, shares have lost roughly two-thirds of their value since topping out at $85 a pop not quite two years ago. Since most of the money that goes into a bubble comes in close to the top, it’s a fair bet that a number of investors are deep underwater from those days.

In today’s market, however, YELP stock is flying high. True, shares are essentially unchanged for the year-to-date vs. a 1.5% gain for the broader market. But step back a couple of months and it’s a story of upside strength. The name climbed 25% in May alone. Multiple expansions suggests the market is feeling much better about its growth prospects.

To be sure, the company’s management team has a long way to go. The top line is expanding at a better-than-expected rate of approximately 25% a quarter, yet Yelp keeps disappointing investors with wider-than-expected net losses.

And it’s not as if Yelp is expected to be profitable soon. The best you can say is that analysts on average expect the company to pare its loss to a penny a share in 2017. That compares to the Street’s guess that Yelp will lose 29 cents this year.

However, the market is forward looking. It pays more for the trend than whatever a company has done in the past. YELP stock doesn’t belong in every portfolio. However, the outlook hasn’t been this bright in ages.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/yelp-stock-bull-case-underperforming/.

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