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Yelp Shares Down on Guidance

Oct 23,2014  Company News, Market News  Comment: 0

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Philadelphia, Pennsylvania – (StockNewsDesk) – 10/23/2014 — Yelp beats earnings and revenue figures handily in its third-quarter earnings report, but shares were down big on weak guidance. Yelp’s revenue came in at $102.5 million, beating Wall Street consensus numbers of $99 million, with a 67% jump on a year over year basis. Earning figures were reported better than expected as well at 5 cents per share, compared to analysts’ expectations of 2 cents per share. However, Yelp’s shares were down 15% in after-hours trading after the earnings report.

Downbeat Guidance

The negative reaction to Yelp’s earnings is due to management reducing expectations for the next quarter, guiding to a range of $107-108 million, compared to expectations of $111 million. Many bulls on the stock stated they were going to buy the “blood” in the stock, as the company has been known to “sandbag” guidance. Sandbagging guidance is the process by which management lowers expectations, thus setting up the company to beat numbers.

Bears, however, argue that the stock price is massively overvalued and a beneficiary of a bubble in Internet stocks. They feel that the company is already priced based on massive expectations that it will inevitably fail to meet. It is already priced at 100 times 2015 earnings, so any misstep is bound to lead to selling.

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CEO of Yelp Inc Jeremy Stoppelman

Continued Growth

Separating the stock and the underlying business, Yelp continues to execute, with the total number of reviews growing as well; in the latest quarter, it had 5.3 million new reviews. Additionally, it is also entering new markets, launching in Chile and Hong Kong in the latest quarter, with more coming in future quarters. The company has also been modestly successful in its attempts to monetize its content with partnerships with local businesses.

These efforts led Yelp to another profitable quarter, as it earned $3.6 million, compared to a loss of $2.3 million in the same quarter in the previous year. Yelp’s newest initiative, allowing customers to make orders through Yelp’s platform, also continues to gain steam with over 20,000 new business signing up. Yelp CEO, Jeremy Stoppelman, expects this attempt to be a driver of earnings and growth going forward.

Turbulence for Share Price

Yelp’s stock, since its IPO, has been described by many market pundits as being the prototypical momentum stock, given its valuation and potential to meet these expectations. It came public in early 2012 at $15, and for almost a year it traded between $15 and $25. After a strong earnings report, it melted up for much of 2013 and the early part of 2014, hitting a high of $101.75 in the spring of 2014.

Since then, the stock has hit a rough patch, getting caught in the momentum stocks sell-off from March to May, when all types of high beta stocks were under heavy distribution. Some of these stocks bounced back with the general market to go on to make new highs, while other stocks, like Yelp, were notoriously weaker. From the middle of June to early October, Yelp remained range bound between $65 and $85.

With the bad reaction to the earnings report, this range has now become resistance. The day after the earnings report will be telling about Yelps near term direction. It is important for the stock that buyers come in on the weakness, helping it close within its recent trading range, otherwise many technically motivated buyers may become sellers.

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