It’s always interesting to look at stocks that just experienced significant plunges in the stock prices. There might be a lot of opportunities for investors to buy stocks at dirt-cheap prices. Yelp (YELP, Financial) is a typical example.
The company went public at the beginning of March 2012 at $15 per share. In the first day of trading, Yelp saw its share price surge rapidly, up to $26 per share. Two years later, in March 2014, its share price went as high as nearly $100 per share. Since then, its stock price has been on the down trend, and it was trading at $19.12 per share Thursday. In the fourth quarter of 2015, a lot of famous investors including Jim Simons (Trades, Portfolio), David Einhorn (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) got into the stock.
Yelp has managed to grow its top line consistently. Since 2011, its net revenue increased from $83.3 million to nearly $550 million, mostly from the company’s local advertising program, including listing pages and impression-based marketing in both search results and mobile apps. The company has generated operating losses of $21.3 million, due to a significant rise in sales and marketing and product development expenses.
Investors might feel excited when looking at its operating data. The number of reviews, mobile Web unique visitors and unique app devices has consistently been in the up trend. An increase in sales and marketing expenses resulted from the additional salaries, benefits, travel and other expenses coming from increased head count. Moreover, new campaigns including those of Eat24 in 2015 have also increased sales and marketing expenses by $23.8 million out of the total $100.7 million increase.
Looking forward, Yelp has three main priorities: To continue to build its core local advertising business, to increase awareness and engagement and to grow transaction. The company saw its huge potential to grow in the mobile segments. ComScore mentioned that the company had only a 30% reach on U.S. smartphones so a campaign to increase awareness is necessary.
According to the company’s fourth quarter earnings call, Yelp had unaided brand awareness that jumped from 26% to 41% in the past year among U.S. adults online. For the full year 2016, Yelp expects growth in revenue to reach $685 million to $700 million and to generate an adjusted EBITDA in the range of $90 million to $105 million.
What might make investors interested is the buyout attempt from both Yahoo! (YHOO, Financial) and Alphabet (GOOG, Financial), now the parent company of Google. In the past, both tech giants tried to acquire Yelp. In late 2009, Yelp turned down a $550 million buyout offer from Google. It also rejected a $750 million offer from Yahoo. At that time, Yelp had around 26 million visitors and 9 million reviews. For a $550 million price tag, Google has valued each unique investor at around $21.
Fast forward to the present, the number of reviews has jumped 10 times while the total number of unique visitors has reached nearly 140.5 million. If each unique investor is valued $21 now, Yelp business value should be around $2.9 billion. At $19.12 per share, Yelp’s total market cap is $1.42 billion, with an enterprise value of only $1.06 billion. Thus, if a quick-and-dirty comparable method is used (the number of unique investors and the price Google offered six years ago), Yelp should be trading at more than $50 per share.
