Over the past six months, Yelp’s shares (currently trading at $26.83) have posted a disappointing 17.9% loss, well below the S&P 500’s 5.1% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Yelp, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Yelp Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are two reasons why YELP doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Yelp’s 7.1% annualized revenue growth over the last three years was tepid. This fell short of our benchmark for the consumer internet sector.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Yelp’s revenue to stall, a deceleration versus This projection doesn't excite us and implies its products and services will see some demand headwinds.
Final Judgment
Yelp isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 4.1× forward EV/EBITDA (or $26.83 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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