YELP (YELP): Attractive Risk-Reward - RBC

RBC Capital analyst, Mark Mahaney dropped his price target on Yelp (NYSE: YELP) by 20% to $33 but still thinks shares can Outperform as revenue growth is stabilizing.

Revenue of $153.7MM came in slightly ahead of Street est at $152.3, and was within guidance range. Yelp’s $126MM Local Ad Revenue did slightly miss Street ests of $127MM, tho growth of 35% Y/Y only narrowly decelerated from Q3’s 36%. EBITDA of $17.5MM came in below Street ests of $21.7MM on higher Sales & Marketing expenses, which are expected to continue through 2016. YELP’s Q1 & FY16 Revenue outlooks bracketed the Street, but due to increased S&M expense slightly missed on EBITDA.

Key points:

1) Local Ad Revenue Growth Appears To Be Stabilizing – 35% Y/Y in Q4 vs. 36% in Q3, with an arguably implied outlook for 2016 of 30%-35%

2) Mixed Local Cohort Revenue Trends Also Suggest Stabilization – while the oldest cohort decelerated 3pts to 30% Y/ Y growth, the youngest disclosed cohort accelerated 3pts to 39% Y/ Y….first time we have seen “non-deceleration” in over a year…

3) Local Advertising Accounts Growth Stable – 6,800 net adds, in-line with RBC/ Street expectations, vs. 7,100 in Q3 and Q4:14 and recent range of 5,900-7,500

4) Mobile Unique Visitor Growth Deceleration – 19% Y/Y to 86MM vs. 22% in Q3 on a 9pt easier comp; the % of Mobile searches was also down 1pt Q/Q to 70%

5) CFO Transition – Yelp is looking for a new CFO with the current CFO helping in the search and transition – always a Flag, but sometime Orange vs. Red

6) Low Margins in Guidance – FY16 Revenue guidance of $685-700MM bracketed the Street, but midpt EBITDA margins of 14% are below expectations of 16%.

Current valuation (9X ’16E EV/ EBITDA & 5X ’17E EV/EBITDA with 30%+ organic ’16E revenue growth AND margin expansion) provides a highly attractive risk-reward.

For an analyst ratings summary and ratings history on Yelp click here. For more ratings news on Yelp click here.

Shares of Yelp closed at $16.06 yesterday.

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