Thursday, May 29, 2014

* YELP - Stock Rips 40% in 3-weeks on MOMO Rebound & Takeover Rumors. But... Is this Equilibrium? Did You Know This?

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YELP is trading $67.72, up 6.78%. The Symbol Summary is included below.

Provided by Charles Schwab optionsXpress

This is a follow up to my post nine days ago:
YELP - Everything You Need; And Why this Company May be Overvalued

In that post I dove pretty deep into the financials, showing revenue and profit margins by year and by quarter. I also re-iterated some of the darker whispers about YELP's business, namely:

According to The Wall Street Journal, most of the complaints were lodged by small business owners alleging that Yelp posts fraudulent reviews that defame their reputation.

Yelp [] receives approximately six subpoenas on a monthly basis, demanding the true identities of the anonymous reviewers.

 Most of these business owners said that the negative reviews posted on the website appeared after they declined to pay Yelp for sponsorship.

This fact along with deteriorating quarterly operating profit margins (see image below) has me wondering about the valuation.

But, when it all came down to it, this was my conclusion:
I like YELP the app (website).  I use YELP.  I rely on YELP.  But YELP is not a $4B company as it's currently constituted.  Not in my opinion.  Operating margins are worsening quarter over quarter, are now and always have been negative, revenue growth has declined, and there isn't much more they can do with gross margins which are at impossibly high levels.

The best case for shareholders would be a takeover -- that price would (could) be over $4B. But unless that happens, I think YELP is over valued... by a lot.

It appears the takeover rumors have been whipping and YELP's stock price is ripping.  The stock charts (all-time) is included below.

Provided by Charles Schwab optionsXpress

This was a $49.11 stock on 5-7-14 and is now 38% higher in just 22 calendar days.  A part of the recovery in equity price has been a correlation phenomenon as the MOMO deflation has reversed somewhat.  The other part of this equity price appreciation are rather frequent are more widespread rumors of a takeover.  Here's a snippet from an article on 5-27-14:

Recent reports claim Yahoo! CEO Marissa Mayer approached Apple  in the hopes that Cupertino would make Yahoo! the search default on Apple's mobile devices.  While the limitations of Yahoo!'s current search product make it unlikely that Apple would agree to the change, opportunities do exist for Yahoo! to make significant inroads in capturing Apple's mobile search business. A purchase of Yelp, a local business search provider, would immediately provide Yahoo! with an important piece of Apple's mobile search business.

Source: The Motley Fool via Yahoo! Finance: Yahoo! + Yelp = More Apple Search Business, written by Bill Shamblin.

I actually agree.  YELP is much more valuable as a part of a larger whole.  I still don't think it's worth $5B, but that's just a dude's (me) opinion.  The equity market says otherwise.  But, here's the rub, I believe YELP is worth less than it's current valuation, the equity market did too just 22 days ago.  If YELP is not taken over or rumors die down, is this a $68 stock?

Said differently, is there a strong argument that  the current price is not the equilibrium price? i.e. the stock will be higher or lower, but not here?  If you believe that, then you disagree with the option market.  Let me show you why.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market.  In this case, the  IV30™ looks forward 30-days.  The chart above shows us that according to the option market, the risk in YELP shares has been declining, and is now in the 14th percentile over the last 52 weeks.  In other words, the option market reflects very low risk relative to the last year in YELP shares for the next month.

"Very low risk" loosely translates to equilibrium pricing.  So... the option market reads: "Yeah, YELP stock is priced just about right."

Now... whether a bull or a bear, a believer i a takeover or not, do you think YELP stock is at equilibrium?  Do you believe YELP stock shows "very low risk" relative to the last year right now?

Finally, the Options Tab is included below.

Provided by Livevol

Using the $67.5 strike straddle in Jun, we can see the option market is pricing a stock range of [$60.30, $74.70] by the end of trading on Jun 20th. or, said differently, the stock will not more than ~$7.20 in the next four weeks.

Keep in mind, the stock has moved $18 in the prior 22 days.
  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.
This is trade analysis, not a recommendation.

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  1. It's ok to be wrong from time to time.

    1. Ha. I'm wrong more than time to time. In either case, I don't think YELP is a $68 stock.