Plenty of analysts and investors are bullish on the future prospects for Yelp Inc (NASDAQ:YELP). Why else would shares be up 40% over the last 12 months? Currently, the Street-high price target calls for Yelp stock to rally another ~40% to $58 per share. With shares about flat on the year so far, bulls would surely cheer such a move.
However, there’s at least one analyst who isn’t too keen on that happening. Keybanc analyst Brad Erickson downgraded Yelp stock from overweight to sector weight on Wednesday. While the business remains healthy, he argued that user engagement seems to be weakening. Combined with his customer checks, Erickson then downgraded the stock.
For what it’s worth, Wall Street’s average price target for Yelp stock is near $47.75, about 15% above current levels. Worth noting is that Yelp’s 52-week high currently sits just above this mark, at $48.40.
Evaluating Yelp Stock
The tough part about Yelp is its valuation. Trading at 170 times this year’s earnings estimates, it’s far from a cheap name. That said, these types of high-growth, high-valuation names generally do come with a high earnings-based valuation.
Making matters even more difficult though is the fact that Yelp doesn’t have the greatest revenue growth either. Analysts expect sales to expand 13.5% this year and almost 17% in 2019. That growth appears so low though because of its asset sale (of Eat24) to GrubHub Inc (NYSE:GRUB) for almost $288 million.
I know, this is getting confusing. But let’s look at last quarter for example: Excluding its deal with GrubHub and its purchase of Nowait, Yelp revenue grew 22% year-over-year. That’s a much better figure.
Further, last quarter the company beat on earnings per share and revenue expectations. It’s full-year revenue and EBITDA projections came in ahead of expectations too and yet the stock still fell. It seems Wall Street and investors are still trying to work through the recent unfolding of Yelp’s new organization.
Some might be wondering why Yelp would bother to sell assets when it hurts growth. Well the truth is, partnering with GrubHub helps Yelp in the sense that the two can work together and both prosper. Yelp has a large reach with customers, while GrubHub had a good setup, but needed traffic. Now when a delivery order is placed with GrubHub through Yelp, the latter will get a cut. Everyone wins!
Ultimately it should help boost the margins for Yelp and even though the valuation is high at first glance, let’s remember we’re talking about a company with just a $3.5 billion market cap that should do close to $1 billion in sales this year. It also has, essentially, no debt.
Trading Yelp Stock
It’s my belief that investors benefit the most when fusing technicals with fundamentals. That’s even more important when you have a company that has a good product but an expensive stock.
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Below all three major moving averages, Yelp stock is sort of floating in no man’s land. That doesn’t mean Yelp is destined to tumble. Just that there’s no immediate way to discern where Yelp will go in the short term.
For instance, $42 had done a good job of acting as support in 2018, and the few times that $40 has been tested it’s done well. With that in mind, I would look to see how Yelp stock handles $40 should it get there. If it fails, a retest of its larger range support near $37.50 should be in play.
It’s pretty clear that $47 to $48 is tough resistance and while analysts aren’t usually chart technicians, one can’t help but notice where their average price targets sit.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
