Thursday, July 17, 2014

* YELP - A Growth Story or a Bust? 7 Charts & a Video

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YELP is trading $67.28, down 1.2% with IV30™ down 0.4%. The Symbol Summary is included below.

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Is YELP a growth company headed to profitability... or not?

This is a follow up to my post on May 20th, 2014:
YELP - Everything You Need; And Why this Company May be Overvalued

"The accusations are out there, that YELP is a bully. That YELP is a cheater."

The stock was trading at $57.38 at the time of that post, so to say the least, so far, my argument has been wrong... no way around it.

Movie (watch in full screen)

YELP may be positioned as a growth company (and in fact very well may be a great growth story), but if we look at the details, really examine under the hood, we may find a story that not only isn't growth, but may be vastly over-valued. As I have said before, there are two caveats to this conclusion.

1. I'm just totally wrong (quite possible).
2. If YELP is acquired (which is a non-trivial possibility), then the stock will almost certainly be bought out at a significant premium, in which case, none of this analysis matters.

I've got a lot to discuss below -- lots of pictures, not a lot of words.  I have also recorded a video blog discussing everything you will read below.  If you prefer videos (~8 minutes), this could be your cup of tea.

Stock Chart (all-time)

Provided by Charles Schwab optionsXpress

Pretty simple, since IPO YELP is up 174%, it saw an abrupt decline earlier in this year falling nearly 50% from ~$100 to ~$50.  Since that decline the stock rocketed back with a furious rally reaching ~$80, and now again is starting a decline.

Here we go...

Bullish Case


YELP's revenue growth is undeniable.  The firm's TTM revenue is now over a quarter billion USD while it started at ~$70M in Q3 2011.  That's huge.

Gross Margins

Comparing YELP to a very specific peer group (see movie) of technology firms between $2B and $50B in market cap, we can see YELP's gross margins are in the 100th percentile. In English, of this ~90 company peer group, YELP is the single best in gross margins at over 93%.  Simply astonishing.

Gross Margins Scatter Plot

Putting those gross margin numbers into context, the chart above displays YELP vs. its peers.  Whether you look at the horizontal chart at the top, or in the actual scatter plot, YELP is "simply the best.. better than all the rest" (yeah I just borrowed lyrics from Tina Turner).

Gross Margins Time Series

Here's one little factoid to be aware of... While YELP's gross margins are bananas, they actually have always been this high, since literally day 1 as a public company. That's "good" because it shows sustainability of these margins, but it also points to a very important fact... gross margins can't improve anymore.  If YELP wants to find profits, it will have to come from somewhere else.

Net Income Time Series

This is also good news / bad news... Certainly losses are shrinking substantially... but there still isn't a profit and the rate of improvement is shrinking.

Bearish Case

Growth Isn't Happening

If we look back to the earnings & growth summary, check out the one- and two-year growth numbers for both 'Earnings from Continuing Operations' and 'Net Income.'  YELP falls somewhere between the 13th and 26th percentle relative to this peer group.  Even more important are the actual values... they are all negative. Keep in mind, we are talking about 1-year growth

While having negative earnings (losses) may be acceptable for a firm growth revenues, how can the growth argument hold if 'continuing operations' growth is diving over one and two-years?

Earnings from Continuing Operations 1-year growth Scatter

Here's the scatter plot of earnings from continuing operations 1-year growth... YELP is down 43% year-over-year... That's just not growth...

Operating Income / Operating Expenses

This is a critical measure. At some point Op. Income must be greater than Op. Expenses.  For growth companies we allow this ratio to be below 1 (revenue < expenses) as long as the margins are improving.  But... in the time series above, this margin isn't really changing at all... It started at 89% and now it's at 96%... keep in mind 100% simply means Operating Income = Operating Expenses.

Again... where's the growth?...

Net Income

Finally, simply looking at the Net Income Margin for TTM. YELP is negative and in the 18th percentile relative to peers.

OK, that's it.  Time for you to decide:

Is YELP a growth company headed to profitability... or not?

This is trade analysis, not a recommendation.

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