It’s not every day that you hear a major analyst saying that a beaten-down stock could go up by 100%. But that’s exactly what happened to Yelp Inc (NYSE:YELP) stock.
On Tuesday, RBC Capital analyst Mark Mahaney reiterated his “Buy” rating on YELP stock and set a price target of $33.00. Given that Yelp is currently trading at $15.38 a share, Mahaney’s price target represents a more than 110% upside for the stock. (Source: “Analyst Offers Insights on Technology Companies,” AnalystRatings.com, February 9, 2016.)
The sentiment around Yelp stock cannot be described as bullish after a disappointing earnings report. It also doesn’t help that the company’s CFO, Rob Krolik, is resigning.
Mark Mahaney, a highly followed analyst in the Internet industry, thinks otherwise.
The analyst told Bloomberg, “We like the stock, because we think that they have built something that’s sustainable, and we think that’s well factored in where the stock is now, in terms of valuation.” (Source: “Yelp Plunges to 2012 Low Amid CFO Departure,” Bloomberg, February 8, 2016.)
He pointed out that one of the key metrics to look at is the number of users of Yelp’s mobile app. And that number “is still growing pretty healthily.”
“You are also seeing the number of local businesses that are using Yelp is now at about 111,000 that are paying them on a monthly basis,” adds Mahaney. “That growth hasn’t really crested.”
Perhaps the most exciting point is that the company might be bought by one of the Internet behemoths. Mahaney said that at today’s price tag, “Yelp could be a very easy tuck-in for a name like a Google.”
Yelp Needs to Do This to Be Great Again
Going forward, the biggest challenge for Yelp is competition coming from giant Internet companies. For instance, Alphabet Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB) have increased their presence in local advertising, and could potentially crowd out niche sites like Yelp.
To this concern, Mark Mahaney said that companies like Yelp would need to innovate aggressively and get more people to use their apps to stay in the game.
But exactly how will Yelp innovate? And how can it increase usage of the Yelp app?
Well, the company might want to look towards the East. This is because the Chinese counterpart of Yelp has successfully turned itself around.
I’m talking about Dianping, which was once a review site just like Yelp. However, in 2010, the company made the smart decision of moving into the online-to-offline (O2O) commerce market.
Essentially, Dianping started to offer group buying. That attracted tons of new users. When the app offers you better deals on restaurant meals and movie tickets, you would want to get them through the Dianping app.
In turn, the added users made the company much more appealing to businesses. Restaurants wanted to partner with Dianping to tap into the company’s giant userbase. The positive cycle started to really work.
Last October, Dianping merged with a leading Chinese group buying site Meituan. The merged company, Meituan-Dianping, just raised $3.3 billion in its newest round of funding in January. Want to take a guess of how much the new company is worth? A whopping $18.0 billion! That’s seven-times the market capitalization of Yelp and Groupon Inc (NASDAQ:GRPN) combined. (Source: “Chinese Online Group Meituan Dianping Raises $3.3 Billion,” Financial Times, January 19, 2016.)
The Bottom Line on YELP Stock
Today, most people look at Yelp as a web site of reviews. To find growth, the company needs to do a better job at connecting consumers with businesses. That is, users need to have more incentive to stay on the site or app after reading the reviews. And on that front, O2O could be the way to go.
Yelp has started offering a restaurant reservation service through its added feature “OpenTable.” Users can also schedule manicures, order flowers, and book legal consultations through the app. If the company manages to go full-fledged O2O, investors might want to take a fresh look at YELP stock.