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The “Smart Money” Latches on to Yelp Inc (YELP)

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Yelp Inc ( YELP ) has been getting mostly negative reviews from Wall Street. But hedge fund manager David Einhorn, who runs Greenlight Capital Re, Ltd. ( GLRE ), thinks this is misguided. In his most recent investor letter, he gives Yelp "five stars."

Best Small- and Mid-Cap Stocks to Buy Now: Yelp (YELP)

Einhorn points out the Yelp remains one of the world's top online/mobile platforms, with nearly 200 million unique monthly visitors and a 21st rank in the U.S. app stores.

And while Einhorn acknowledges that the company has posted choppy earnings , he thinks that this has resulted in an appealing value opportunity for investors.

With Yelp stock off by nearly 50% during the past year, the price-to-sales multiple is now at 3. This compares to 5 for LinkedIn Corp ( LNKD ) and 4 for Twitter Inc ( TWTR ).

So what's the catalyst to get Yelp stock in gear? For Einhorn, he says that the company is taking swift actions, such as by restructuring the workforce, improving reporting tools to boost return on investment and focusing more on transactional revenues.

In fact, he thinks that all this could result in a doubling of revenues by 2019 and $300 million in EBITDA. If so, Yelp stock could fetch $55.

While this seems appealing, the thesis is still dicey. Let's face it, the tech world is highly dynamic and making a three-year revenue forecast is difficult.

Besides, as I noted in a recent post, Yelp faces intense competition . Just some of the rivals include Angie's List Inc ( ANGI ), Amazon.com, Inc. ( AMZN ), Priceline Group Inc's ( PCLN ) OpenTable, Pro.com, Thumbtack, Kudzu and Urbanspoon. Then there is Alphabet Inc ( GOOG , GOOGL ), which accounts for a majority of Yelp's desktop visits. And yes, Google periodically changes its search algorithms, which could potentially ding Yelp's traffic. Then there is Facebook Inc ( FB ), which has amassed over 50 million business pages and is testing its own review system.

Yelp's Bad Buzz

Interestingly enough, Einhorn also dismisses the potential impact of the upcoming movie, Billion Dollar Bully , which IMDB describes as a documentary that "takes an investigative look into accusations that online marketing giant Yelp! is running a mob-like extortion racket against business owners who refuse, or can't afford to pay-to-play."

Gauging the impact of this is far from easy. But hey, as seen with the poor performance of SeaWorld Entertainment Inc ( SEAS ), a hard-hitting documentary can certainly be damaging to a brand . Of course, in a world saturated with social media, negative messages can certainly get amplified.

If anything, there has already been quite a bit of drama with Yelp. For example, there have been controversies of a couple employees who were terminated. One claimed she was underpaid and another alleged that she needed unpaid leave to care for her boyfriend, who suffered from a brain ailment.

Bottom Line On Yelp Stock

Einhorn points out the possibility of a takeover. But if Yelp continues to lag, then the interest could be tepid. And with the steep fall in Yelp stock, there may not be much interest from management in a takeover right now anyway.

Finally, Einhorn's stock-picking prowess has been challenged lately. For last year, his fund suffered a 20.2% loss . Keep in mind that he had a position in SunEdison Inc ( SUNEQ ), which recently plunged into bankruptcy.

So even the world's top investors can flub. And in the case of Yelp, I think Einhorn may be a bit too eager in his review.

Tom Taulli runs the InvestorPlace blog IPO Playbook . He is also the author of High-Profit IPO Strategies , All About Commodities and All About Short Selling . Follow him on Twitter at @ttaulli . As of this writing, he did not hold a position in any of the aforementioned securities.

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


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

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