Technology

RBC Explains Why Yelp Shares Could Actually Be Worth 60% More

Yelp Inc. (NYSE: YELP) may have run into serious growth issues, and the company was unable to find a buyout partner. Shares also fell a whopping 75% from their highs as the valuations were in the nose-bleed seating section. Maybe that was all then, and maybe not even bad news at Yelp lasts forever.

Yelp has managed to secure a rare analyst upgrade, and the firm even raised its price target rather than upgrading it with a lower target, based on valuation. The online reviews site was raised by RBC Capital Markets to Outperform from Sector Perform, and the firm raised its price target to $42.00 from $34.00.

What stands out here, outside of the upgrade action itself, is that this new price target projects 60% upside in Yelp shares. The call was also well above the prior consensus analyst price target of $30.98, and it would still value Yelp at less than half of its 52-week high of $90.00.

Note that Yelp’s most recent earnings report may have been considered good enough when compared to the past. Credit Suisse had tried to be very aggressive on Yelp back in August.

ALSO READ: 10 Brands That Will Disappear in 2016

RBC’s call is on the heels of a tech conference presentation and after meeting with Yelp’s management. This was not just a valuation upgrade either. RBC said that it feels better about the company and its growth prospects. RBC even said that Yelp could easily reverse its share slide ahead (maybe 60% upside projected speaks louder than words).

RBC now contends that Yelp still deserves a premium valuation to other online peers. The reason for that assumption is a high growth trajectory. Yelp was even called a company with consistently strong execution and a clear strategic value.

24/7 Wall St. would note that analyst upgrades in Yelp have often come with all sorts of caveats. Some have even come with much lower upside versus the past. This analyst upgrade is impressive on the surface, with a projected upside of just over 60%. Of course investors should keep in mind that analyst upgrades do not always work out, and that Yelp still has to go out and perform.

Another reminder is that Yelp’s valuations are still extremely high — 175 times last year’s earnings, with a small loss expected in 2015 and a barely positive 2016. With revenues expected to reach almost $700 million in 2016, that is a valuation of only about three times its expected sales.

Yelp shares were last seen up 2% at $26.42 on Friday morning. Its high so far on Friday was up at $27.49.

ALSO READ: Merrill Lynch Has 4 Safe High-Dividend Stocks to Buy for Retirement and Income