I don’t think I’m alone in my opinion that most everyone loves Yelp Inc (NYSE:YELP). Prior to YELP, we were stuck with random business reviews that could be written by anyone. But through this company’s innovative peer-to-peer review system, most of the contributed content is helpful. As the Yelp platform becomes more popular, business owners are taking an active role in addressing user comments.
Inarguably, Yelp is a time saver. Unfortunately, YELP stock is no money maker.
Don’t get me wrong — it’s not nearly as disappointing as Twitter Inc (NYSE:TWTR). However, the two names do share similarities. For one thing, both of their initial public offerings met significant fanfare. Because their services are so amazingly trendy, the logical assumption was that the sentiment would carry over into the markets.
That assumption was not accurate. Although early investors of YELP stock are profitable today, the returns aren’t that great. You could get similar or better results by simply buying shares of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). And those that got in at peak pricing are hurting badly, losing around 60% or more. Naturally, these are folks that are losing patience with YELP stock.
The most recent Yelp earnings for Q4 didn’t do anything constructive. Although the company dramatically exceeded its earnings-per-share target, it provided worse-than-forecasted guidance for Q1 and the full-year. Shares have technically had trouble sparking upside momentum. Can the upcoming Yelp earnings report help turn things around?
Hit or Miss, Yelp earnings Will be Eventful
For Q1, analysts have soft expectations. Consensus estimate for EPS is a loss of 8 cents, which is near the low-end of the forecast spectrum. The worst prediction calls for a loss of 15 cents per share, while the most optimistic analyst sees two cents in the clear. Last year, Yelp EPS was expected to drop by 16 cents, but the actual figure wasa loss of 20 cents.
Of particular note is the fact that the company has a very poor record in Q1 performance. Along with the wide miss in 2016, YELP stock fell short in 2013 and 2015. However, no discernible relationship exists between the Yelp earnings result and next-day performance in YELP shares.
That does not mean investors can afford to be complacent. Since 2013, YELP stock has averaged 9.4% in single-day returns following a Q1 report. This breaks down into three up-days averaging 20%, and one loss of 23% in 2015.
No matter what happens, Yelp is likely to make a huge move. For those that want to trade the Yelp earnings, the challenge is not predicting what the actual figures are. Wall Street obviously doesn’t care about that. Instead, it’s all about the guidance. If management provides an optimistic outlook, YELP stock will soar. If not, you don’t want to hold this bag.
It’s difficult to forecast how Q1 will play out and what management will say. The company’s actual sales trend is encouraging, having either met or exceeded expectations. Also, its trailing three-year revenue growth is ranked higher than most internet and information firms. However, the negative guidance from Q4 was certainly not helpful.
Taking a Shot on YELP Stock
What is easier to predict is the outcome. Yelp is an options trader’s dream because it’s likely to move somewhere in a hurry. Thus, I expect daytraders to initiate positions based on its movement, not its ultimate direction.
But for those that have better things to do than daytrade, I would play the straight probabilities. Shares have more frequently jumped higher off of Yelp earnings than the other way around. So if I had to gamble, I’d take the long route.
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The theory is that the next big move is a jump higher. Conspicuously, this pattern has developed right before the Yelp earnings.
I’m not alone in the bullish speculation towards YELP stock. Last month, InvestorPlace contributor Tyler Craig stated that “despite the bearish overtones, buyers are stepping up in defense of the $32 support level, making for an interesting trade setup.” Also, further back on Valentine’s Day, InvestorPlace’s Nicolas Chahine entertained the idea with a hedged position.
Of course, this is no guarantee. YELP could easily crumble on a negative surprise. Nevertheless, my curiosity is piqued. Historical probabilities of Yelp earnings are favorable. The technicals offer a tailwind. Other analysts recognize the same development. It’s a risk, but it’s a very calculated one.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
