Why Yelp Shares Remain a Bargain

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Yelp Inc. (NYSE: YELP) has performed incredibly over the past year with shares up over 60%, but this is also withstanding a pullback of about 10% in 2017 alone. However, Credit Suisse believes that the pullback is over and that the stock is only going up from here.

Credit Suisse’s Paul Bieber and Stephen Ju reiterated an Outperform rating and with a $49 price target. Keep in mind that this price target is just $3 short of the highest analyst price target on Wall Street.

Yelp shares are down 18% since reporting fourth-quarter results in early February, primarily due to soft quarter for advertiser additions and a disappointing 2017 EBITDA outlook. The brokerage firm sees the sell-off as overdone, given the view that sales force productivity likely returned to normal in the first quarter and the 2017 EBITDA outlook is likely conservative.

With double-digit sales force growth expected this year, investments in performance advertising, food delivery momentum, continued focus on national accounts as well as self-serve, and option value on Request a Quote (RaQ) monetization in the second half of the year and 2018, Yelp has several tailwinds that could drive upside to 2017 estimates.

Credit Suisse detailed its meeting with Yelp management in its report:

We had the opportunity to meet with CFO Lanny Baker last week in San Francisco. While no intraquarter update was provided, the tone was generally positive with the discussion centered on Request a Quote (RaQ), product innovation (ie. RaQ, No Wait, Cash Back, etc.), national account and self-serve initiatives and Yelp’s significant opportunity in a very fragmented local market. Key takeaways included: 1) RaQ testing will continue throughout ’17 but some monetization will likely begin in 2H17 and will ramp in ’18; 2) declining incremental EBITDA margins implied in guidance embeds investments in direct response advertising but no associated rev. or margin benefit; and 3) national accounts and self-serve remain tailwinds.

The firm believes that the RaQ option value was not reflected in Wall Street’s estimates. Credit Suisse estimates that RaQ has the potential to generate $50 million to $210 million in incremental revenue in 2018, depending on the monetization strategy that Yelp pursues. Credit Suisse has a revenue estimate of $1.08 billion in 2018, versus the consensus of $1.07 billion.

Shares of Yelp were last seen up 1.4% at $34.58 on Monday, with a consensus analyst price target of $41.32 and a 52-week trading range of $18.65 to $43.41.