Yelp: More Valuable To Another Party

Despite an activist calling for a far higher stock price, a bullish call from Goldman Sachs is what got Yelp Inc. (NYSE:YELP) above $40. The consumer review site has long been overlooked despite constantly improving financials. My investment thesis remains ultra Bullish on the stock, with a price target more in line with the activist.

Wimpy Goldman Call

Yelp surged 10% on Goldman Sachs only hiking the yearly price target on the stock from $38 to $47. The analysts only suggest the consumer review site produces up to high-single digit advertising revenue growth through 2027.

Outside of a Covid hit in 2020, Yelp has a history of double-digit revenue growth. Activist TCS Capital Management demanded that the company should look at a deal for selling the business in the $70+ range.

Back in May, TCS Capital suggested the business with 73 million users, 265 million reviews, and 6.3 million businesses should trade with a scarcity value. The stock would be worth $70 based on just 12x 2024 estimated adjusted EBITDA targets, while a scarcity target would value Yelp at 15x 2024 adjusted EBITDA, or closer to $80.

The consensus analyst EBITDA estimates for 2024 is now $341 million, up from around $303 million in 2023. Yelp forecasts a 2023 midpoint of $300 million.

Yelp potentially has a management problem, contributing to the low stock value. Instead of loading up on cheap shares in the low $30s earlier this year, management routinely unloaded shares.

Naturally, these executives have valid reasons to dumping shares, even when the stock might be undervalued. The problem here is that insiders haven't bought shares in years. It is a sign of complacent management with too many stock awards from the business that none of them wanted to buy shares an activist saw with 100%+ upside.

Shareholders want management more tied into stock appreciation while current management appears tied to stock awards. According to TCS Capital, management has sold $120 million worth of stock since 2018 and possibly provided a huge contribution to why Yelp constantly runs up to $40 and struggles to trade higher.

Deep Discount

Yelp guided to 2023 adjusted EBITDA of $300 million, yet the stock only has a market cap of $3.0 billion after the 10% Goldman Sachs rally. Remember, management spent the early part of the year unloading stock at $30 with Yelp trading at $42 today.

TCS Capital probably has a valid point to where management has too much compensation tied to stock options, not stock performance. Yelp spent a rather aggressive $46 million on stock-based compensation ("SBC") in Q1 2023 alone.

A company with revenues targeted at $1.3 billion annually shouldn't be spending over $150 million each year on SBC. Product development costs shouldn't top $100 million annually for a company only producing ~10% revenue growth.

For these reasons, Yelp probably has more value as a buyout target. A new management team could make the business far more productive and profitable by stripping out excessive compensation.

At 15x the analysts adjusted EBITDA targets for 2024, the stock would have a valuation of $5.1 billion. Once factoring in the $414 million cash balance, the stock could be worth up to $80 to an external party.

The vast majority of the difference between the GAAP profits and adjusted EBITDA is solely the high levels of SBC a new management team could address. Yelp is highly cash flow positive, producing nearly $200 million in operating cash flows last year alone.

Takeaway

The key investor takeaway is that Yelp remains very compelling at $40. Yelp Inc. stock has a solid case for hitting the activist targets, and a breakout above $40 might draw more investors into the nearly forgotten tech stock.

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