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4 Big Reasons Yelp Stock Will Soar In the Back Half of 2020

Alongside all of its digital advertising peers, shares of Yelp (NYSE:YELP) have crashed and burned over the past few weeks on fears that businesses will cut ad budgets significantly so long as the novel coronavirus pandemic keeps consumers locked up at home.

4 Big Reasons Yelp Stock Will Soar In the Back Half of 2020

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Yelp stock, down 45% from its mid-February highs, has actually fared worse than most peers. That’s because this company has disproportionately high exposure to the restaurant industry, local services and small-to-medium sized businesses. Those three groups are among the most at-risk groups during the pandemic. Therefore, these three types of businesses are almost certainly cutting back on things like ad spending on Yelp.

Overall, it has been an ugly 2020 for Yelp — and reasonably so.

However, there’s reason to believe that this ugly start to 2020, positions YELP stock to have an explosive comeback in the second half of the year. Specifically, there’s four big reasons to believe that a huge rebound rally is in store:

  1. The coronavirus pandemic appears to be “plateauing,” and the economy could rebound in the second half of 2020. Daily reported cases of the coronavirus are dropping across Europe, and starting to flatten out in the U.S. This puts us on track to have near-zero Covid-19 transmission by May/June. Thereafter, there’s enough stimulus in the pipeline to promote a gradual recovery in economic activity.
  2. Pent-up consumer demand for physical experiences could turn into robust consumer discretionary spend on retail and restaurants. While consumers may not be quick to hop on a plane or book a cruise in the aftermath of the pandemic, they will have tremendous pent-up demand to “do things.” One of the safer physical experiences for U.S. consumers is to frequent local businesses, like retail shops and restaurants.
  3. Yelp has sufficient liquidity to weather second-quarter business weakness. With $466 million in cash on the balance sheet, no debt and working capital of roughly $400 million, Yelp’s balance sheet is strong enough to withstand a few months of horrible business operations.
  4. Yelp stock is very cheap. Even after revising my long-term growth estimates lower, I still see YELP stock finishing the year up around $40 — making the stock look incredibly cheap at current levels.

The Economy Will Normalize

The coronavirus pandemic is tracking in the right direction, and ahead of schedule.

That is, strict social distancing measures across Europe and the U.S. have “flattened the curve” and caused reported new cases to start dropping. This trend should persist. If it does, then the U.S. could hit near-zero local transmission of Covid-19 by late May or early June.

The economy will normalize thereafter, on the back of significant monetary and fiscal stimulus. Consumers will go back out and shop. Advertisers will re-up their budgets. And Yelp’s growth trends — which will be nothing short of awful in Q2 — will recover meaningfully in the third and fourth quarters.

Pent-Up Demand Will Boost Discretionary Spending

There is tremendous pent-up demand right now from U.S. consumers to go out and “do things.” This pent-up demand is simply what happens when you take 340 million consumers who are used to shopping and eating out regularly, and tell them they have to sit inside and watch Netflix (NASDAQ:NFLX) all day.

Still, memories of the coronavirus pandemic will linger far after the pandemic itself dies out. As such, consumers are unlikely to act on that pent-up demand by engaging in higher-risk physical activities, like global travel or cruises.

Instead, consumers will act on their pent-up demand by engaging in lower-risk physical activities, like going to restaurants, gyms and shopping malls. When they do those things, they often use Yelp to help them find the right local experience.

As such, Yelp’s engagement has a chance to increase significantly in the second-half of 2020. Such a pick-up in engagement will coincide with a pick-up in ad spending on the platform.

Sufficient Liquidity to Weather the Storm

There’s no denying that Yelp’s second quarter will be really bad. But, Yelp has sufficient liquidity to ride out an awful quarter.

The balance sheet has $466 million in cash. There’s no debt. Working capital is about $400 million. Those are pretty big numbers for a company that had total expenses of just $980 million last year.

In other words, Yelp has enough liquidity to absorb a bad quarter, and sail through to the other side without risking insolvency or lasting damage.

Yelp Stock Is Too Cheap

I’ve revised my long-term estimates on Yelp lower to account for coronavirus disruption in 2020. Still, I see this company growing revenues and profits at a mid-to-high, single-digit clip over the next several years (post 2020) thanks to improved ad platform capabilities and effectiveness.

My 2025 earnings-per-share estimate for Yelp presently sits at $2.90. Based on a 20-times exit multiple and a 10% annual discount rate, that implies a 2020 price target for YELP stock of nearly $40.

That’s about double where YELP stock trades hands today.

Bottom Line

Yelp is disproportionately exposed to the coronavirus pandemic thanks to its reliance on restaurants, local services and small-to-medium-sized businesses. But, down 45% from recent highs, YELP stock is fully priced for a disastrous second quarter.

What YELP stock isn’t priced for, is economic normalization and a few strong earnings reports in the back-half of 2020. It increasingly appears likely that those things will happen. If they do, then YELP stock could soar from here into the end of the year.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/4-big-reasons-yelp-stock-will-soar-in-the-back-half-of-2020/.

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