Yelp Inc (NYSE:YELP) stock heads into its Q1 report seemingly in good shape. YELP stock trades just off a three-year high and has a very healthy 90x forward EPS multiple. And that’s one of the reasons why Yelp earnings on May 10 could be dicey.

YELP is pricing in a lot of growth, even if, as I argued back in December, YELP stock isn’t quite as expensive as forward earnings multiples suggest. YELP plunged after Q4 earnings in February amid concerns about higher spending; the market quickly forgot the bad news, however, and the stock retook its highs.

I’m skeptical investors will be quite as forgiving this time around if earnings disappoint — at all. Street estimates aren’t particularly onerous, but it does look like the market at the least is pricing in full-year results ahead of guidance. If Yelp earnings don’t show that the company is heading in that direction, Friday could be a tough day for YELP stock.

Yelp Earnings Expectations

Analyst estimates for Yelp earnings are pretty much in line with the company’s guidance given after Q4 earnings. Revenue is expected to rise about 10% year-over-year; last year’s sale of Eat24 is presenting a modest headwind. Yelp is guiding for adjusted EBITDA of $29-$32 million against a year-prior figure of $29.3 million.

Yelp’s performance on both fronts should be closely watched. On the top line, the issue will be not just how much revenue grows, but how it grows. Yelp’s traffic growth doesn’t look particularly impressive of late. Per figures from the 10-K, the number of reviews added in 2017 rose less than 6% YOY. Mobile web unique users actually declined between 2015 and 2017.

Yelp has overcome that issue by growing its advertiser base, which has risen 50% over the last two years. But that’s an expensive proposition and one that raises margin concerns.

The midpoint of Yelp’s guidance suggests that EBITDA margins actually will compress YOY. And while that’s due in part to spending on initiatives like Nowait and Yelp WiFi, Yelp still isn’t showing the leverage it needs to.

So the risk in Yelp earnings is twofold. At a multiyear high, revenue likely needs to come in ahead of expectations to keep the rally going. But if Yelp is buying that revenue — the concern that drove the initial plunge following the Q4 report — that won’t be enough. And YELP stock could be set up for a big fall.

Bottom Line on YELP Stock

Because net margins are so thin, YELP’s forward P/E multiple of 90x+ isn’t as onerous as it appears. Just a couple hundred basis points of margin expansion could lead earnings to rise sharply and quickly. On an EV/EBITDA basis, YELP is much cheaper, trading at about 20x the midpoint of 2018 guidance.

That’s a relatively reasonable figure, as is a sub-4x EV/revenue multiple. But one key concern about the EBITDA figure is how much it benefits from the exclusion of stock-based compensation. Yelp is guiding for $175-$187 million in adjusted EBITDA in 2018. That excludes $112-$116 million in share-based compensation.

So far the market has forgiven that spend. But that patience won’t last forever, as Twitter Inc (NYSE:TWTR) has learned over the past few years. And it, too, sets up a scenario where YELP stock could see a major selloff if Yelp earnings disappoint.

Free cash flow excluding dilution is going to be under $70 million this year. A reasonable ~30x multiple could see YELP stock drop by one-third.

All told, Yelp earnings need to be extremely strong. And at this valuation, even that may not be enough. From here, Yelp looks priced close to perfection. Anything less than perfect this afternoon could lead to a tough Friday morning for YELP stock.

As of this writing, Vince Martin has no positions in any securities mentioned.