Yelp Stock: No Reason Not To Dive In (NYSE:YELP)

MasterCard, VISA, American Express, Discover payment options on a restaurant door

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A renewed flight to safety has begun, with investors fearing both unchecked inflation and the relative ineffectiveness of both fiscal and monetary policy to prevent a stagflation from occurring. Amid this backdrop, it’s a good time to invest in safer, beaten-down stocks that have plenty of rope from a valuation front to recover.

Yelp (NYSE:YELP) is a top pick in this regard. The consumer-reviews site, best known for its restaurant ratings, has had much better fortunes than its compatriots in the tech sector this year. Its stock is down “only” ~20%, roughly matching the performance of the S&P 500 – while many other tech stocks have seen declines of 40% or more. Yelp’s relative outperformance is a function of the fact that the stock was already so cheap to begin with – and after the drop, it only became even cheaper. To me, Yelp represents an excellent low-risk way of maintaining exposure to the tech/internet sector, and its outperformance versus tech peers and the market is likely to continue.

yelp price chart
Data by YCharts

I retain my bullish opinion on Yelp. Since I last wrote on the company in February, Yelp has only gotten cheaper while it also produced a very strong Q1 earnings print. Earlier initiatives that Yelp had set in motion on the advertising side are producing strong lifts in advertising revenue, while the company’s years-long efforts in cost cutting have paid off in maintaining adjusted EBITDA levels high.

As a reminder for investors who are newer to this name, here’s a full rundown of the reasons to be bullish on Yelp:

  • Focus on multi-location customers. In other words, Yelp is shifting away from its traditional stronghold of focusing on local businesses and restaurants and going after large, multi-location national chains. These deep-pocketed advertisers benefit from reaching consumers on a platform known for its truthful and useful reviews, and Yelp benefits from having high-contribution recurring clients. Yelp is reshaping its sales teams to cut down on account executives focused on lower-dollar customers (the Local sales headcount is at 50% of pre-pandemic levels) and is instead hiring much higher-ROI salespeople focused on enterprise customers.
  • Sales strategy shift has not impacted account growth. Yelp continues to grow its paid advertiser accounts at a healthy pace thanks to the success of its self-service channel, and average spend per account is also gliding upward.
  • The impacts of the pandemic won’t last, but Yelp’s cost cuts will. Yelp was an early reactor to the pandemic and aggressively laid off/furloughed a large portion of its sales team. The company considered this move as part of a broader push (even before the pandemic) to cut down its Local (small business-focused) sales teams, hire more Enterprise-facing account executives, and shift staff away from its San Francisco headquarters and to geographically cheaper locales.
  • Reducing and shifting real estate footprint. More to the point above: by shifting to a primarily remote-work policy and shuttering offices in large metro areas, Yelp estimates that its savings on real estate alone will drive $9.5-$11.5 million in annual savings, which isn’t a small amount for a company generating just over $1 billion in annual revenue. The hiring of a distributed workforce, and in locations other than the Bay Area, will bring personnel cost benefits on top of these real estate savings.
  • Buybacks. Yelp has purchased $274 million of its stock since it began an aggressive buyback program in October 2020, which is a significant portion of the company’s ~$2 billion market cap. There is another $182 million remaining on the current buyback authorization, as of the end of Q1. Given Yelp continues to have a healthy cash balance and generous EBITDA/cash flow each quarter, I expect to continue seeing aggressive buybacks going forward.

Valuation remains a key draw to Yelp as well. At current share prices near $30, Yelp trades at a market cap of $2.10 billion. After we net off the $465.1 million of cash on Yelp’s most recent balance sheet (which also suggests Yelp could probably be more aggressive with buybacks if it wanted to), the company has a resulting enterprise value of $1.63 billion.

For the current fiscal year, meanwhile, Yelp has maintained its guidance of $1.16-$1.18 billion in revenue and $260-$280 million of adjusted EBITDA (though it added commentary that it would likely land on the high end of this range).

Yelp guidance

Yelp guidance (Yelp Q1 shareholder letter)

Regardless, against the midpoint of Yelp’s guidance ranges, the stock trades at just:

  • 1.4x EV/FY22 revenue
  • 6.0x EV/FY22 adjusted EBITDA

Yelp’s multiples would be more indicative of a business that is in a steep secular decline; not one that is growing revenue at a mid-teens pace. There is a huge dislocation between sentiment for this stock and the actual, underlying fundamentals. Take advantage of that gap to take a stake in Yelp at a very favorable price.

Q1 download

Let’s now dig into more of the details of Yelp’s most recent quarter. The Q1 earnings summary is shown below:

Yelp Q1 results

Yelp Q1 results (Yelp Q1 shareholder letter)

In Q1, Yelp grew its revenue at a 19% y/y pace to $276.6 million, beating Wall Street’s expectations of $266.6 million (+15% y/y) by a healthy four-point pace. Yelp also accelerated its revenue growth by two points relative to 17% y/y growth in Q4.

Yelp described the quarter as “defying historical seasonal trends.” The company notched an all-time high of 546k paid advertising locations. In spite of the company turning its sales department’s focus to larger enterprise/multi-location clients, the company has spent a lot of R&D on its self-service platform to attract smaller local businesses, and this thoughtful segmentation has seemingly paid off.

Paid advertiser locations

Paid advertiser locations (Yelp Q1 shareholder letter)

And, as seen in the chart below, Yelp’s ad clicks are also up 4% y/y. Where revenue growth was driven, however was in higher cost per click, which rose 17% y/y. The company attributed the increase in CPC to both inflating ad rates as well as the higher consumer engagement that Yelp saw in its clicks, particularly in the Services category.

Key advertising metrics

Key advertising metrics (Yelp Q1 shareholder letter)

Here’s some helpful anecdotal commentary on the company’s go-to-market progress from CEO Jeremy Stoppelman’s prepared remarks on the Q1 earnings call:

Advertising revenue from services businesses increased 14% year-over-year to a quarterly high of $160 million, reflecting record revenue per location. At the same time, advertising revenue from restaurants, retail and other businesses continued to recover increasing 27% year-over-year.

We also made further progress on our initiatives to drive sales to our most efficient channels, driven by record acquisition and strong retention self-serve channel revenue increased by more than 30% year-over-year to reach a new high in the first quarter. At the same time, we saw robust demand for our expanded portfolio of ad products for multilocation advertisers.

Multilocation channel revenue increased by more than 35% year-over-year. Together, these channels represented 46% of advertising revenue in the first quarter. Beyond these results, our team remain focused on advancing our strategic initiatives, which are designed to drive sustainable and profitable growth in the long-term through an elevated pace of product innovation.”

Yelp also boosted its adjusted EBITDA by 10% y/y to $48.1 million. Now, adjusted EBITDA margins did fall by two points to 17%, but this was driven largely by an increase in cost of services due to an increase in traffic (which should hopefully have a lagging effect on eventually boosting revenue). Sales and marketing costs as a percentage of revenue, meanwhile, fell 3 points (driven by greater sales productivity, owing to the focus on multi-location customers).

Yelp adjusted EBITDA

Yelp adjusted EBITDA (Yelp Q1 shareholder letter)

The company notes that it expects adjusted EBITDA, on a dollar basis, to meaningfully increase in the back half of FY22.

Key takeaways

I continue to view Yelp as a low-risk value stock that is great to add on pullbacks. As you have free cash that you are looking to deploy on dips, continue to add value-oriented stocks like Yelp, especially as its outperformance vis-a-vis other tech peers has already been proven out in the year to date. Stay long here.

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