Yelp Inc (NYSE:YELP) has been on a tear since reporting earnings in early May, which sent Yelp stock up 36% in the last two months. Not everyone, however, is so keen on the stock moving forward.
Citigroup’s Mark May downgraded YELP stock from “buy” to “neutral,” emphasizing three main reasons for his change in heart: an enthusiastic stock performance, modest advertising revenue guidance and pressured margins.
According to May, the stock’s 36% gain since reporting first-quarter earnings was “driven entirely” by the company expanding its Ebitda multiple by 40%, and not because the company’s future forecasts look rosy. They have, in fact, remained the same as before the run in the YELP stock price.
As for ad revenue guidance, the sustainability of the numbers put up in Q1 remains in question. May believes that the company “downplayed the sustainability of the trend,” and notes that user mobile and transaction sales slowed in the first quarter.
That brings us to margins, where May sees an earnings risk as the company’s guidance “assume[s] a significant increase in margins/leverage in 2H16.”
Bottom Line on YELP Stock
Yelp stock’s current perch of $29 is a nearly 5% premium to the average consensus of $27.70, and out of the 37 analysts covering the stock, 23 recommend holding or dumping it. Earlier this month, Wells Fargo analyst Peter Stabler lowered his target to between $21 and $23 from $22 to $24, also believing the company has an uphill battle with margins, international traffic and local ad competitions. Then there’s Vetr, which reduced its “strong buy” to a “buy” recommendation.
But with 14 still holding “buy” or “strong buy” recommendations, some bullishness remains. Indeed, even after the downgrade, Citi actually upped its target from $27 to $31, signaling nearly 7% upside.
Yelp stock was initially down less than 1%, but it came on some fairly light volume, and now YELP is up 1.5%, meaning the market couldn’t care less about another downgrade.
That bit of bullish tide may not last, however. The company reports earnings next Tuesday, and the consensus is for a loss of 7 cents. The last time Yelp beat Q2 earnings was in 2014, so get ready for some fireworks either way on July 26.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
