Yelp (YELP, Financial) may be the de facto search engine for local restaurants, but the company’s weak business model has led to limited profitability. In addition to the weak business model, Yelp has also attracted a lot of hate due to several controversies regarding extortion over the last few years. As a result, the stock has lost about 80% of its value over a span of 18 months.
With the company expected to report its earnings today, investors may be looking eagerly for signs of recovery. Although Yelp has a weak business model, the stock may have bottomed and can offer upside potential in the short term.
Yelp is one of the most volatile stocks on earnings. With the company already near 52-week lows, investors should not short the stock heading into earnings. In fact, given the negativity, Yelp may be a contrarian buy right now.
For the upcoming quarter, Wall Street analysts are expecting Yelp to post a loss of 3 cents in earnings per share. This marks a large year-over-year decline in earnings as Yelp reported a profit of 8 cents per share in the corresponding quarter of the previous year.
On the revenue front, Yelp’s top line is expected to grow 38.6% year over year to $152 million. Strong revenue growth is a positive for Yelp, and all the negative factors are already baked in Yelp’s share price. A minor earnings beat can send the stock a lot higher from the current levels, and given the pessimistic sentiments around Yelp, the stock is a contrarian buy heading into earnings.
Acquisition is likely
Having lost almost 80% of its market cap, Yelp is now valued at only $1.36 billion. For a company that is expected to report double-digit revenue growth in the future, Yelp’s valuation looks cheap. The cheap valuation may even trigger an acquisition bid from the likes of Priceline (PCLN, Financial), which can benefit from Yelp’s business and its collection of data over the last few years.
Yelp’s rival Angie’s List (ANGI, Financial) has been an acquisition target for InterActiveCorp for quite some time now. Angie’s List may have rejected InterActiveCorp’s buyout offer, but it is widely believed that the latter will come up with an improved bid very soon. Angie’s List’s business model is also very weak, and it has experienced a similar decline in stock price as Yelp over the years. Despite the weakness, Angie’s List is a compelling buyout target for InterActiveCorp and Yelp investors can hope for a similar acquisition in the near future.
Given Yelp’s plunge, an acquisition offer is likely in the future. And like in the case of Angie’s List, an acquisition offer can push Yelp’s stock a lot higher from the current levels.
Conclusion
All the bad news has already been priced in Yelp’s stock, and the stock can surge higher after a decent earnings report. In addition, given Yelp’s downfall, the company is cheap enough to be considered an acquisition target by the likes of Priceline. Investors can consider buying Yelp heading into earnings as I believe the stock has short-term upside potential.
