Will Yelp Stock Recover?

Yelp is also one of the many companies that experienced a slowdown as the pandemic swept the globe. As a site offering reviews on everything from restaurants to beauty salons, the pandemic brought this service to a screeching halt.

Yelp (YELP) finally caught a break in May 2021 as states eased COVID restrictions and business owners embraced the digital world in an effort to boost sales.

A combination of factors that brought about this turnaround:

  • Improved customer foot traffic
  • Eased pandemic restrictions
  • Yelp’s own initiatives

Together they helped Yelp stock to bounce back with vigor. As the world returns to a semblance of normalcy, Yelp is positioned well to capitalize on this business activity uptick. As demand continues improving, Yelp could not only maintain its current growth trajectory, but could also deliver some solid returns.

Yelp History: Quick Snapshot

Founded in 2004 by Russel Simmons and Jeremy Stoppelman, Yelp is a combination social media platform meets business review platform.

It connects consumers with various local businesses in various industries, such as dining, shopping, and more.

The company continues investing in its varied products and its steady approach allows it to help businesses earn the trust of their customers and, more recently, to recover from the recent economic downturn.

As Yelp strives to help businesses, however, Yelp could use some help of its own.

Yelp Had a Tough Year in 2020

Yelp’s Q4 earnings report for the prior fiscal year missed expectations by quite a lot. As a result, in March 2020, Yelp (YELP) withdrew its Q1 earnings report and full-year outlook due to its concerns related to the still-developing coronavirus scare.

Yelp is inextricably linked to the much smaller businesses it serves, so as small businesses closed or scaled back operations across the nation, Yelp was hard.

Customers reduced advertising budgets, which is about 96% of Yelp’s revenue. By April 2020, the company announced just how much interest had dropped in various industries:

  • Restaurants by 64%
  • Nightlife by 81%
  • Gym memberships by 73%
  • Salons and beauty businesses by 83%

In a surprising move, Yelp created pandemic relief campaigns for businesses around the nation – without first getting permission from businesses. It created these campaigns on the popular fundraising site, GoFundMe, for businesses that had less than five locations.

The company maintained its stance that this was intended to help struggling businesses. However, this angered the entrepreneurs when they found out after the fact that there was a GoFundMe account set up for them.

Small businesses claimed that Yelp never reached out to them for permission. When business owners learned about these accounts – many learned via their customers – they demanded to be removed from the program. Yelp eventually closed the program, but the move had already generated animosity amongst its users.

This put Yelp in a bad spot – the majority of its ad revenue comes from service businesses in various industries, such as restaurants, gyms, and beauty salons. Dining establishments accounted for 14% of ad revenue and were the most-reviewed businesses on the platform.

Many dining establishments made the switch to takeout or delivery methods amidst forced shutdowns but this didn’t necessarily make up for the lost revenue from this industry. Many gyms and beauty salons also had to shutdown in an effort to curb the spread, further exacerbating Yelp’s revenue standing.

Yelp’s Most Recent Earnings Call

Yelp’s Q2 earnings were strong. The company saw a growth of 52% in net revenue in Q2 2020 which netted a positive take of $4 million. 

Ad revenue in services categories, through the self-serve channel, and termless contract retention broke record highs in Q2. According to Jeremy Stoppelman, it’s the “resilience and creativity” of the various teams at Yelp (YELP) and the “consistent execution” of multi-year strategies that contributed to stunning growth, and made Yelp that much more structurally sound.

Consumers continue trusting Yelp to deliver honest reviews of the businesses in their local communities. In fact, in Q2, rates rose across the board. Diners who used Yelp for reservations increased 70% over Q1 2021 (45% more than Q2 2019).

All while restrictions for public health reasons were still in place.

Yelp’s Services category grew during the pandemic’s restrictions as well, which continued throughout Q2. The growth in this category was over 50% YOY. Yelp’s advertisers saw better value for their spending, as high-intent clicks were greater at a lesser cost.

Average cost-per-click declined by 20% while ad clicks increased over 85% compared to Q2 2020.

This, combined with faster product delivery in the past two years showed growing momentum in revenue initiatives. The ad revenue in the Services category for Q2 was nearly 25% higher than Q2 2019, while self-service and multilocation categories corresponded with nearly 45% total ad revenue.

Yelp’s strategic initiative progress is paving the way towards strong financial performance, well expected to surpass levels prior to the pandemic. Q2 net revenue surpassed Q2 2019 revenue by 4% and adjusted EBITDA was up 3%. Chief financial operatives at Yelp remain hyper-focused on continuing this momentum.

Is Yelp Stock a Buy – The Bottom Line

When we analyze Yelp using a standard discounted cash flow forecast analysis, we arrived at a fair market value of $42 per share, suggesting YELP share price can still rise 10% or more from where it currently sits at the time of research.

Historically, the price volatility has been high which means on a risk-adjusted basis the reward potential is not compelling in the short-term but by dollar cost averaging into the position, a more attractive reward-risk ratio could be enjoyed. 

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