On Monday, Yelp Inc. (YELP, Financial), a popular crowd-sourced reviews and recommendations company, announced that it plans to bring back “nearly all” of the 1,100 employees that it furloughed due to the economic effects of the Covid-19 pandemic.
The stock jumped more than 2% before closing 1.73% higher on Monday following the news.
In April, as the pandemic dramatically reduced the number of people looking up restaurants, hotels and other business reviewed on the site, the company laid off 1,000 workers and furloughed 1,100 more. In a further effort to reduce costs, it cut executive pay by 20% to 30% and reduced server costs.
Yelp plans to bring back some of the furloughed workers by Aug. 10, with sales staff returning on a staggered basis over four months. It will be extending its office closures into 2021, laying off 63 employees in the process.
CEO Jeremy Stoppelman stated the following regarding the company’s plans to scale up its workforce again, revealing cautious optimism:
“As local economies begin their recovery, we remain cautious but optimistic in the face of continued uncertainty. We expect to see a continued fluctuation in business openings and closures during the course of the pandemic as communities respond to local outbreaks. While the pacing and duration of the recovery are still unknown, the executive team and board feel confident in our ability to withstand the challenges and embrace the opportunities that lie ahead.”
Caution on reopening
Yelp has historically avoided taking on debt for the most part, indicating that the cost-conscious company’s plan to bring back roughly 20% of its workforce could very well be a response to an uptick in views, clicks and other interactions with its sites.
Though Yelp expects the pandemic to keep earnings depressed for an uncertain amount of time, the U.S. government seems committed to pushing states and citizens alike to speed up the economy’s reopening, downplaying the dangers of the virus and potentially leading to a wider variation in compliance with safety regulations than what might have been achieved with a more cautious reopening.
Thus, as the virus continues to spread with increasingly little effort to inhibit it, review sites like Yelp could receive a boost not only from increasing restaurant and other business traffic, but also from a higher percentage of would-be customers looking to see the extent of a business’s cleaning, social distancing and other safety measures.
Is the traffic returning?
Now, let’s talk numbers. Have there been any measurable signs (at least for us non-insiders) that Yelp could soon see an increase in earnings?
According to a shareholder letter, "By the end of March, page views and searches for Restaurants - our highest frequency category - had declined by approximately 60% compared to the beginning of the month, while page views and searches for Services - our largest revenue category - had declined by approximately 40%.”
In May, when the Yelp released its earnings for the first quarter ended March 31, the company reported that traffic had stabilized at approximately 50% of pre-pandemic levels, while the pay-per-click advertising budgets of its ad customers stabilized after declining 25% between March and April. The company plans to utilize business-to-business performance marketing to generate self-serve claims and advertising starts, reducing the costs associated with scaling advertising up and down on short notice.
According to Alexa rankings, Yelp’s traffic and engagement metrics are roughly flat over the past 90 days through July 13, with the daily pageviews per visitor up 1%, the daily time spent on site per customer down 4% and the traffic and engagement ranking at #445 (a few places higher than #439 three months ago).
Some of the more permanent damage from restaurant closures will need to be regained further down the line as new businesses crop up. Approximately 49% of businesses listed on Yelp are restaurants, and the company reported that 24,000 of its listed restaurants were closed due to the pandemic at the end of June, with half of those closures being permanent. Another study by the National Restaurant Association found that by March, 30,000 independent U.S. restaurants had closed their doors permanently.
All-in-all, the traffic seems to be stabilizing and maybe even slowly returning, and it will likely continue to do so in the future as the economy reopens, but people remain hesitant to frequent restaurants at the same rate they did before the pandemic.
Valuation
Given its recent difficulties and the fact that it seems to be planning for a recovery by re-hiring about a thousand furloughed employees, could Yelp be a potential value buy?
According to GuruFocus data, the stock was a net buy of gurus during the first quarter, when shares traded at an average of $30.63 (or around $21.79 excluding pre-market-crash trading). Steven Cohen (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies were among the buyers, while Ken Fisher (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) reduced their positions in the stock.
At the end of the most recent quarter, Yelp held $491 million in cash, cash equivalents and marketable securities and no debt, giving it a strong advantage over competitors and other companies in general when it comes to recover speed and maneuverability. This is not a company that will be dragged down by excess leverage or expenses.
Given these factors, it seems likely that Yelp’s valuation will continue to go up unless the overall stock market turns bearish again. According to the Peter Lynch chart below, if the company can achieve the same level of earnings it did in 2018 within a decade or so, the stock will turn out to have been a good buy at current levels. However, the trailing 12-month price-earnings ratio of 71.06 might still give value-oriented investors pause, as disappointing earnings could cause the price to plunge further before it recovers.
Conclusion
As Yelp begins to bring back its employees, the company seems to be positioned for slow growth as traffic to its customers remains lower than pre-pandemic levels. The company’s commitment to having no debt gives it a great amount of flexibility that it can use to lower costs and facilitate the turnover from bankrupt businesses to new players.
However, unlike tech giants whose earnings were not materially impacted by the pandemic, Yelp’s earnings rely on a mostly non-tech economy of restaurants, services, retailers and similar businesses. The company’s earnings are thus likely to follow the underlying state of the U.S. economy, meaning that shareholders run the risk of facing more panic-selling due to missed expectations before things get better.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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