What’s The Downside To Yelp’s Valuation If Its Active Local Account Base Doesn’t Bounce Back?

by Trefis Team
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Yelp’s business has two primary components – the demand side, which the company has been trying to spruce up with the partnership with GrubHub, and the supply side, which has been volatile due to a change in the company’s selling policies. We expect the dependence of Yelp’s business on paying accounts to largely dictate the stock price over the coming years.

Our interactive dashboard on Yelp’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation, and see all of our Technology company data here.

Yelp’s stock has been on a roller coaster ride ever since the company decided to transition local advertising to selling non-term contracts. While the first quarter after the change exceeded account additions versus expectations, Q3 was marred by lead generation issues, leading to a major fall in the stock price. While Q4 came in above consensus expectations, paying advertiser growth declined sequentially. Management’s guidance reflects an expected ramp in revenue growth: 4-6% for Q1, 8-10% for 2019 and mid-teens for the next 5 years, acknowledging the short-term pain arising from the adjustment of its selling process.

However, we also note that issues in Q3 were more from hindrances in the company’s internal systems, and across all the quarters, user transactions (measured by reviews and app unique devices) have continued to grow.

Our dashboard presents three scenarios on the paying advertiser growth:

1) A bull case wherein the growth rebounds;

2) A base case where growth remains flat; and

3) A bear case where paying advertiser growth becomes negative.

Our bull case results in a fundamental price estimate of $44, an upside of nearly 10% to our base case price estimate. Meanwhile, the bear case value of $28 implies a downside of around 30% to the base case.

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