YELP Stock: Who Will Buy Yelp Inc?

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The latest hot trend in tech? It’s M&A. And one of the latest companies to get swept up in the buzz is Yelp Inc (NYSE:YELP). Interestingly enough, the company recently nixed its dual-class structure, which could make it easier to pull off a deal.

YELP Stock: Who Will Buy Yelp Inc?

No doubt, investors have already been making a wager on a deal. Just in the last three months, Yelp stock has chalked up a gain of 55%.

But can the momentum continue? Or should there be caution?

Why Is YELP Stock Attractive?

Well, to start, let’s see why the company would make an attractive buyout target. For the most part, YELP is a top player in the massive market for local advertising, which includes over 20 million businesses in the U.S. and about $151 billion in ad spending.

The company also has the benefit of being a pioneer of the industry, having been launched back in 2004. In other words, YELP has a strong brand and has built out the complicated infrastructure of selling to small businesses as well as dealing with online reviews.

But there are definitely some risk factors. And perhaps the most notable is the intense competition, especially from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Over the past few years, the company has changed its search algorithms — which has harmed traffic for YELP — and has also integrated its own local listings in search results.

Granted, such moves have impacted mostly the desktop platform. But there are also signs that mobile traffic is under pressure. In the latest quarter, YELP reported a mere 7% increase of MAUs (monthly active users) for mobile devices, which is the slowest in the company’s history.

So to deal with this, Yelp has been effective in pumping up its monetization. During Q2, local advertising revenues jumped an impressive 41% and there was a small profit. The platform also demonstrated impressive engagement, with a 78% customer repeat rate.

Yet if the user growth remains sluggish, then it will be tough to keep this up. And this is probably the main catalyst for Yelp to sell out. Might as well do a deal before things get worse, right?

Definitely.

The good news is that there are plenty of possible suitors. Oh, and all of them have substantial market caps and cash positions to pay a premium. Just some of the possible buyers include Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), Tripadvisor Inc (NASDAQ:TRIP) and Priceline Group Inc (NASDAQ:PCLN).

Now, it’s true that the valuation on Yelp stock seems a bit pricey. Keep in mind that the average price target from Wall Street analysts is roughly $38, which is below the current value of $40.

Yet this may not matter much. When it comes to a buyout, a large tech buyer has some inherent advantages, such as the ability to cut duplicative costs and to leverage existing distribution channels.

Actually, a clear case of this was PCLN’s acquisition of OpenTable, which was struck a couple years ago. It’s important to note that the valuation was a hefty 13 times revenues. As for Yelp stock, the current multiple is 5X.

OK, this does not mean a deal will be done at OpenTable’s level — or that a buyout is even a slam dunk. But it does seem reasonable that — if there is some type of transaction – there is more upside potential for Yelp stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook and also OptionTaxes.com, which provides interactive tools for those who have employee stock options (pre and post IPO). Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/yelp-stock-will-buy-yelp/.

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