Yelp, Inc. (NYSE: YELP) is hard to think of the way in which it was reported on Monday, so we want to caution readers perhaps to consider this more of a thought rather than a real rumor. A report on Bloomberg showed that it is now much cheaper for Google Inc. (NASDAQ: GOOG), Yahoo! Inc. (NASDAQ: YHOO) or Facebook Inc. (NASDAQ: FB) to look at acquisitions.
While this report cited Macquarie as the firm referenced, the reality is that any time you see second and third tier stocks – or even high-flyer stocks – get whacked you can expect this sort of logic to arise. OpenTable Inc. (NASDAQ: OPEN) was even mentioned in the reference as one that is now cheaper.
Again, we would consider this a pondering rather than the start of something real. The article also cited a note that eBay Inc. (NASDAQ: EBAY) could want in on one of these.
It goes without saying that these stocks are cheaper to acquire for an acquirer who would have liked to own them. That being said, the notion that they are cheaper does not mean they are cheap. We learned this from some of the same sort of logic after the tech bubble burst in 2000.
Yelp my have lost 50% of its value with shares right at $56, but the market cap is still $4 billion. The problem is that Yelp is expected to post an operating loss in 2014 and is only expected to earn $0.32 per share in 2014. Does 175 times 2015 earnings sound very ‘cheap’ to you?
And OpenTable? At $69.65, the stock is still down just over 20% from its peak above $87 before the sell-off. Its market cap is only about $1.65 billion, and it is profitable. Still, its forward earnings valuations are about 37 times the 2014 earnings estimates and only 30 times expected 2015 earnings. That is far cheaper on comparable metrics – but it is far from cheap.
We would warn investors that calling things cheaper to buy is far from buyout rumors. Maybe these have been beaten down that they just rallied with the broad market. They may even trade higher on their own – particularly if the market cooperates. Just please don’t buy these just on hopes that they are now cheap enough to be acquired just because pre-public valuations and buyouts elsewhere have been through the roof.
And, all caveats aside, anything is possible. Yahoo!, Facebook, Google, and many others have made many acquisitions which were not ever sold at all to investors. They certainly were not rationalized by the great or cheap earnings multiples, and they weren’t touted as being good deals on a relative book value metric.