Yelp (YELP) shares are rising after Bank of America Merrill Lynch upgraded the stock to Buy from Neutral, saying that the risk/reward ratio is favorable and its multiple can increase.
FAVORABLE RISK/REWARD: Yelp's stock has dropped 24% this year after the company made some execution errors in the fourth quarter of 2016 and the first quarter of this year, wrote Bank of America Merrill Lynch analyst Justin Post. However, easier comparisons for the rest of this year, especially in Q4, should enable it to report improved net account additions going forward, while revenue expectations for the company have reset to more reasonable levels, the analyst stated.
MULTIPLE COULD INCREASE: Noting that Yelp is trading at a 30% discount to its peers based on EBITDA multiples and contending that Yelp can meet newly reduced Street Q1 estimates, Post says that the valuation gap could close if the company's execution improves.
RESULTS NOT AS BAD AS THEY LOOKED: Yelp's Q1 results had a number of positive aspects, Post believes. Specifically, the number of businesses paying for ads increased by 4,000, up from an increase of 3,000 in Q4, and the number of devices using its app jumped 22% year-over-year, versus a 20% year-over-year increase in Q4, Post wrote. Additionally, Yelp's sales productivity rose last quarter, he noted. TARGET: Post raised his price target on Yelp shares to $37 from $35.
PRICE ACTION: In early trading, Yelp gained 2.6% to $29.55. However, the stock remains down by over 22% year-to-date.
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