Can Yelp Make a Comeback With Q3 Earnings?

Yelp Inc. (NYSE: YELP) is set to report its most recent quarterly results after the closing bell on Thursday. The consensus estimates call for $0.19 in earnings per share (EPS) and $262.25 million in revenue. The same period of last year reportedly had $0.17 in EPS and $241.1 million in revenue.

Earlier this quarter, there was speculation that Groupon would merge with Yelp. One problem there is that Groupon had a market cap of $1.6 billion, and Yelp’s market cap was about $2.2 billion.

With a deal of this sort, to buy up almost certainly would require more than just a massive further dilution, and that means adding a big chunk of debt. Wall Street and Main Street probably will not reward a company for leveraging up over a deal that might come with overly difficult integration costs.

Many mergers, particularly when rumors abound, come with potential plot twists. There actually may be a strong and better suitor out there, but for one company or both?

One factor that makes things very difficult to accomplish here is that Groupon is down about 85% from its 2011 post-IPO peak, while Yelp is down by about two-thirds from its 2014 peak. This means there is a tail of disappointed long-term shareholders. Also, Groupon is based in Chicago and Yelp is based in San Francisco.

A Wedbush report said:

We see a potential merger of Groupon and Yelp as a strategically sound move that would create a unique local advertising company with strength at the top of the funnel through content, and bottom of the funnel through transactions. We see both revenue and cost synergies with the combined companies that we think create a company where the sum is greater than the individual parts. We believe Groupon and Yelp complement each other very effectively, better position the company to compete in the digital advertising landscape, better compete with Google, and create a more seamless and valuable consumer proposition. We don’t necessarily think a deal is imminent, and we think Yelp will rebuff a takeover attempt by Groupon, at least initially. We therefore don’t change our Neutral ratings on either Yelp or Groupon shares at the moment, and there are no changes to our estimates either. We would revisit this analysis and our ratings in the event an acquisition/merger was announced.

Excluding Thursday’s move, Yelp had underperformed the broad markets, with its stock down about 6.5% year to date. In the past 52 weeks, the stock was down closer to 25%.

A few analysts weighed in on Yelp ahead of the report:

  • SunTrust Banks has a Hold rating with a $37 price target.
  • Morgan Stanley has an Underweight rating and a $31 target.
  • Evercore ISI has a Hold rating with a $38 price target.
  • D.A. Davidson has a Buy rating.

Shares of Yelp traded down nearly 5% on Thursday to $31.20, in a 52-week range of $29.33 to $45.45. The consensus price target is $39.29.