How Long Before Yelp, Inc. (YELP) Makes Shareholders Yelp?

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By Jeff McAllister

Yelp, Inc. (YELP) has escaped the unfortunate fate of other recent social media IPOs such as Facebook, Inc. (FB) and Groupon, Inc. (GRPN). But, for how long?

While the misfortune of FB and GRPN has been well documented, YELP has been able to forge ahead with bloated valuations relatively unnoticed. On many levels, the online customer review site makes the social network and coupon stocks look cheap.

Let’s take forward P/E, for example. YELP trades for 511 times 2013 earnings projections. Meanwhile, FB and GRPN can be had for more reasonable 30.11 and 11.42 forward price-to-earnings ratios, respectively.

Is there anything within Wall Street’s sales and earnings estimates that warrant such a disparity? The answer is no. Analysts are forecasting 45% growth and just a nickel in eps for YELP.  Facebook and Groupon are forecasted to grow revenues at slower rates of 28.4% and 19.9%, respectively, and earnings growth of 28% for FB and more than 100% for GRPN.

While we acknowledge that YELP might deserve a slight P/E premium over its two peers, there is nothing in side-by-side comparisons of 2013 revenue and earnings projections to demand a forward P/E that’s 16x FB and 45x GRPN – nothing.

On a look-back basis, YELP is overpriced relative to FB and GRPN, too. The “word-of-mouth” stock trades for 14.71 times sales. Meanwhile, the 'like it' company has a price-to-sales ratio (P/S) of 9.2 and GRPN’s P/S is a much healthier 1.33.

At Thursday, September 6, 2012’s closing price, YELP is valued at 11.21 times its book value of $2.30. Facebook’s price-to-book is a reasonable 2.99 and, Groupon trades for 3.49 times its book of 1.20.

Based on PEG ratio, the best value is GRPN at 0.76, then FB at 1.39, and YELP lags badly as they are unprofitable at the moment.

By no means does our opinion mean YELP is ready to crash; however, the company will have no margin for error in future earnings announcements. In OptionsANIMAL’ view, YELP is priced-for-perfection.

And perfection could be hard to achieve, as the company wrote in its 10Q, “Our domestic expansion plans include growth in our existing markets as well as expansion into new markets, many of which are smaller than our current markets, as we look to expand our breadth of coverage. Internationally, as we are in the early stages of establishing our footprint, we are targeting a mix of both large and small markets. We have not yet made any substantive effort to monetize our international markets and have not generated significant revenue from these markets to date.” (emphasis added)

Trying to predict when the bad news wolf will show up and blow the company’s house of bloated valuations down is hard. Perhaps, it will be the next time YELP reports earnings on November 5, 2012. At the very minimum, OptionsANIMAL would suggest YELP shareholders takesomeprotectiveaction prior to quarterly profit checkups, maybe buying some put options or writing call options.

It’s possible for Yelp to avoid the fate of some its high-profile peers; however, at some point, the company’s growth rates and valuations will have to line up. That can happen one of two ways:

  1. A share price reversal like FB and GRPN
  2. Or accelerated growth rates continuing while the stock price lags

For investors, we hope for the best with option B, but shareholder must be prepared for the worst with option A.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks , Options , Technology

Referenced Stocks: FB , GRPN , YELP

OptionsANIMAL

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