Yelp: Is the Earnings Bar Set Too Low?

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Yelp Inc. (NYSE: YELP) is scheduled to report its second-quarter financial results Tuesday. The consensus estimates from Thomson Reuters call for $0.01 in earnings per share (EPS) on $133.48 million in revenue. EPS in the same period from the previous year were $0.04, on $88.79 million in revenue.

Piper Jaffray’s Gene Munster thinks that Yelp’s buyout optimism has perhaps faded. Munster downgraded Yelp to Neutral from Overweight based on the fear of no deal surfacing. What really stood out though was that the price target was slashed to $46 from $70 in this downgrade.

However, Munster still seems to see close to a 65% chance that a deal gets done. Facebook and Priceline were named as the most likely acquirers, with a new deal now less likely from the likes of Amazon.com, Apple, Google, GrubHub, TripAdvisor and Yahoo.

What also stands out in this at-the-money price target of $46 is that is that the valuation is still more than 300 times expected 2015 earnings per share and almost 100 times expected 2016 earnings per share. Yelp’s value is also currently $3.4 billion, and that is without taking into consideration any would-be mandatory buyout premium that shareholders would be expecting.

How many companies can spend $4 billion or $5 billion and justify the price tag being 100 to 300 times forward earnings? Yelp has been in operation for long enough that it is expected to be profitable. It just runs at very low profitability, and the last earnings report was enough of a disaster that shares fell from $51 to under $40 — before news surfaced that Yelp might be looking to sell itself.

Ahead of the earnings report, a few analysts weighed in on Yelp:

  • Brean Capital reiterated a Buy rating.
  • Barclays downgraded Yelp to Equal Weight from Overweight and lowered its price target to $36 from $50.
  • Cowen reiterated a Buy rating with a $55 price target.

Shares of Yelp were down 2.5% at $34.15 on Friday afternoon. The stock has a consensus analyst price target of $51.69 and a 52-week trading range of $33.35 to $86.88.

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