In today’s Daily Alert, Cabot Stock of the Month Editor Timothy Lutts recommends a growth stock that is resisting the market’s downward pull, and The Energy Strategist Analyst Igor Greenwald advises selling an underperforming position.
“Yelp, Inc. (YELP, NYSE) launched its business in San Francisco in 2004, creating its name by combining and shortening the words ‘Yellow Pages.’ The San Francisco market is now mature but still growing, and every market the company has entered since then—Yelp is currently in 97 markets in the US, Canada, Europe and Australia—has followed the same growth trajectory, though somewhat faster. In short, growth is predictable—and that growth is not slow! The group of markets launched in 2005-2006, for example, grew 59% last year!
“For revenues, Yelp depends on advertising, of course. Local advertising currently accounts for 70% of revenues, while brand advertising accounts for 21%, with the remainder coming from other services. And there are still many more advertisers to attract. In fact, of the estimated 53 million local businesses in the firm’s targeted regions, only 1.1 million have claimed their Yelp sites and just 45,500 are advertising on Yelp. So the growth potential for the company, which has no debt, is still huge.
“And as more business get listed, they will attract more Yelp users who become business patrons—one study showed that just having a decent presence on Yelp can boost sales by about $8,000, with that number tripling if it’s combined with marketing efforts. And as more of these users write reviews for businesses, their presence on the site will attract more advertisers, creating a self-reinforcing cycle similar to the one that once made giving away fat yellow phone books a profitable venture.
“But you can’t take a fat phone book with you when you leave the house, and with 45% of Yelp activity now on mobile devices, the future is clear. Yelp’s revenue growth rates are very healthy (see below) and cash flow is positive. Expansion activity has kept earnings in the red so far, but that should change in the quarters ahead: analysts are estimating earnings will hit $0.16 per share in 2014.
“Lastly, Yelp is the hands-down leader in content and viewership and thus is the odds-on favorite to win as local advertising goes increasingly digital.
“As to the chart, Yelp went public on March 2, 2012, at 15, climbed to 24.5 on its first day of trading, and hit 32 a month later. But it then cooled down, and didn’t exceed that old peak until early last month, when an excellent earnings report sparked big-volume buying that gapped the stock up to 32. ... As the stock is still in that neighborhood more than seven weeks later—while the broad market has been falling apart—it’s clear that YELP has some serious institutional supporters and thus has great potential to break out of this range when (or even before) the market regains its health. I recommend buying here, as the 25-day moving average (now at 30) and the 50-day moving average (now at 29) converge. BUY.”
Timothy Lutts, Cabot Stock of the Month, www.cabot.net, 978-745-5532, July 2013