Investors didn’t react kindly to the Q2 results from Yelp (YELP), but the numbers weren’t very devastating. The consumer review site has the cash to survive until business normalizes and the financials to not suffer during the virus shutdown. My bullish investment thesis wants investors to understand the clear opportunity here as the economy normalizes and people learn how to operate under virus restrictions.

Image Source: Yelp website

Not So Devastating

With a lot of the major cities in the U.S. shutdown mid-April, Yelp appeared set to report some very devastating numbers. Some questions even existed on whether the company had enough cash for the downturn.

The Q2 results show a company skating through a period with traffic down 50% at one point with no material damage. Sure Yelp has seen lower revenues, but the company still generated positive EBITDA in the quarter. Even the cash balance is up to $526 million.

In total, revenues declined 32% to $162 million while EBITDA dipped to only $11 million. These numbers just weren’t horrible with revenues actually beating analyst estimates by over $16 million.

Yes, key app unique devices were down 23% to only 28 million while paying advertising locations dipped 31%. Both of these numbers are short term issues sure to resolve with a return of either new advertisers or old locations when the economy improves. The key is that cumulative reviews surged 12% to 214 million. The more reviews, the more long-term value.

Source: Yelp Q2’20 shareholder letter

So Yelp endured the worst possible economic scenario for a company reliant on consumers exploring the world for places to dine or visit. Consumers stuck at home don’t need Yelp.

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The company stands here in early August with revenues around June levels down 25% due to the virus slowing down the rebound because of the re-surging cases. At the same time, Yelp plans to increase operating expenses by ~$30 million in Q3 to bring employees back off furlough and restore work hours.

The consumer review site needs to invest in the business for long-term growth. The current signs on the virus show the start of the burnout process that would allow Yelp revenues to rebound the rest of the quarter.

A lot clearly depends on where the virus cases go from here. In addition, how governments and citizens handle a resurgence in cases considering lower negative outcomes now and a better understanding of the reality of fewer infections in August than during the peak back in March will determine how Yelp does in the short term.

Deep Value

A case can definitely be made that a lot of previous paying advertisers won’t reopen. Thousands of restaurants and small businesses won’t survive the economy downturn impacting places that previously advertised on Yelp.

Ultimately though, business will return and new restaurants will open where other places closed. Consumers will turn to Yelp to find which restaurant is still open and advertisers will spend to attract those users.

The stock only has an enterprise value of $1.0 billion so one only has to take a look at the $169 million Q2 revenues to start contouring up some deep value. Analysts previously had Yelp reaching 2021 sales of $1.2 billion while the estimate has dipped to only $916 million now.

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The big $16 million Q2 revenue beat and the fact June was only down 25% supports a far higher revenue number than analyst estimates. Regardless, the stock at $22 is far too cheap for the business. Yelp now has a 1.3x EV/S multiple in comparisons to Alphabet (GOOG, GOOGL) up at 5.2x.

Data by YCharts

Yelp has about 72 million shares outstanding and the $526 million cash balance. Assuming business normalizes back at revenues of $1.1 billion in 2021 (still some $100 million below pre-virus estimates), the stock would only trade at a 2x EV/S multiple at $38.

The stock essentially traded around this level prior to the virus impact, but investors need to keep in mind this remains a very low EV/S multiple. Double the multiple would be normal for 10% revenue growth.


The key investor takeaway is that a lot of uncertainty exist with Yelp and their paying advertisers. Ultimately though, whether from the virus burnout of a vaccine here in a few months, business will normalize closer to 2021 estimates. The stock is far too cheap here with an EV of only $1.0 billion. Investors should use the weakness to load up.

Disclosure: I am/we are long YELP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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