Does YELP Stock Deserve a Second Chance?

YELP StockOver the past several years, Yelp Inc (NYSE:YELP) has been a disappointment to many investors. But a surprisingly robust earnings report has set off a buying frenzy that sent YELP stock soaring. Has this long-underperforming stock finally found its mojo, or are investors ready for another round of disappointment?

A Rare Show of Good News for Yelp Stock

The past few years have been rough for those maintaining YELP stock, as the company’s economic earnings plummeted from -$28 million in 2012 to -$75 million in 2015, dropping even further to -$90 million over the trailing 12 months (TTM). Yet Yelp revenue see-sawed upwards from $138 million in 2012 to $550 million in 2015, going even higher to $629 million TTM. Meanwhile, both its return on invested capital and after-tax profit dropped from seven percent in 2014 to -3% TTM. (Source: “Yelp’s Destruction Of Shareholder Value,” Seeking Alpha, August 31, 2016.)

One might be able to overlook a less-than-stellar track record if the company was able to turn out nothing but good news regarding its products and services. But Yelp’s problems spill over into the headlines, with a seemingly endless skein of media stories about phony or hostile Yelp reviews generating litigation and charges of rankings manipulation. Rarely has a tech company had its name attached to so much unpleasant news coverage.

However, all of that seemed to disappear—if only for a while—when Yelp’s second-quarter earnings demolished analyst expectations. Yelp stock reported earnings of $0.16 per share on revenue of $173.4 million, which is far above analyst estimates of $0.07 per share on revenue of $169.82 million. After the earnings news came out on August 10, YELP stock skyrocketed by 13.66% to $37.10 in mid-afternoon trading. (Source: “Yelp Stock Soars, But Critics Remain,” TheStreet.com, August 10, 2016.)

The good news in August was a far distance from Yelp’s catastrophic earnings report in February, when the company announced a $22.0-million loss. Shares fell by roughly 50% over a two-month period. (Source: “Yelp’s Rally And 8 Other Stocks That Could Be 2016’s Comeback Kids,” Forbes, August 10, 2016)

Jeremy Stoppleman, Yelp’s co-founder and CEO, used the second-quarter YELP stock earnings calls to engage in self-congratulatory accolades and promise a more muscular future financial performance. “Second quarter results were strong, highlighted by local revenue growth accelerating to 41% year-over-year,” he said. “Revenue exceeded our expectations, driven by upside across all sales channels, as well as slightly better than expected revenue retention. That revenue outperformance helped grow adjusted EBITDA by 24% year-over-year, even as we invested for the long-term. And based on these results, we’re increasing our outlook for the year.” (Source: “Yelp (YELP) Jeremy Stoppelman on Q2 2016 Results – Earnings Call Transcript,” Seeking Alpha, August 9, 2016.)

A Mixed Consensus for YELP Stock

But is the time right for a new round of Yelp stock purchases? Across the investment community, there is no solid opinion on the question.

After its latest earnings report, YELP received ratings upgrades from three significant entities. Raymond James Financial, Inc. (NYSE:RJF) upgraded its rating of Yelp stock to “outperform” while Axiom Capital Management and Mizuho Securities both issued ratings upgrades to “buy,” and RBC Capital Markets kept its “outperform” rating. (Source: TheStreet.com, op cit.)

A number of prominent institutional investors are also placing their money here: IBM Retirement Fund, Bank of Montreal, Prudential Financial Inc (NYSE:PRU), and Public Employees Retirement Association of Colorado have boosted their respective stakes in YELP stock. (Source: “Yelp Inc. (YELP) Lowered to ‘Sell’ at Vetr Inc.,” The Cerbat Gem, August 30, 2016)

But on the other hand, Vetr Inc cut its shares in Yelp stock from “hold” to “sell” in an August 29 report. And two high-profile investors—Stephen Weiss, CIO at Short Hills Capital Partners, and Kevin O’Leary, chair of O’Shares Investments—used an appearance on CNBC’s Fast Money Half Report to openly deride the logic of investing in Yelp stock, with Weiss questioning the metrics in the stock’s sudden upgrade and O’Leary dismissing its abrupt August 10 ascension as “speculation” rather than a serious investment. (Source: TheStreet.com, op cit.)

Even a couple of Yelp Inc executives seem to have their doubts: Senior Vice President Michael Stoppelman sold 5,000 shares of Yelp stock on August 22 while COO Geoffrey L. Donaker sold 6,000 shares back on June 8. (Source: The Cerbat Gem, op cit.)

The Takeaway Regarding YELP Stock

It is easy to appreciate the exuberant response to Yelp’s earnings report; after all, it seemed out of the ordinary after a too-long desultory stretch. And there seems to be little reason to question whether the company will take two steps back in its next earnings report following this giant step forward.

On the other hand, Yelp Inc does not have a track record of treating its shareholders with any degree of generosity. While this new turn of events offers reason for cheer, it may not be such a bad idea to wait and see what the near-term future will bring. Those with YELP stock in their portfolio may want to hold it for the time being, while those curious about investing in the company would do well to first see how the Yelp story plays out in the next few months.