Of course a trade like this requires some luck, as there is no way of knowing when a buyout like this will occur. But at the same time, hard work digging deep into a company and a sector can help one have conviction in a trade, despite what all the bears and naysayers may say.
So why would one still be bullish on a company despite the fact that it:
- Has reported a few horrible earnings reports in a row, and worse yet, has returned to losing money after being profitable.
- Has shown declining user growth and declining website traffic.
- Has a negative documentary being produced on it.
- Has been the recipient of numerous class action suits as well as an FTC investigation into it's review and advertising practices?
- Has had rumors that the company is looking for a buyer, a possible sign of desperation.
The Answer? It's unique asset, and the cost it would take for another company to try and buy the data - which, unless someone created a time machine, would be impossible to re-create - It's 77 million local reviews completed over 11 years.
The similarities between Yelp( $YELP ) and OpenTable are uncanny, and is why I think, despite what most are saying out there, that Yelp( $YELP ) will be acquired before the summer is over.
OpenTable / Yelp Similarities
- OpenTable was in a similar position as Yelp( $YELP ), where it was the best of breed in a niche sector, with competitors appearing seemingly every few months like Yelp and Google. Some analysts and bears cautioned that the competitors would eat OpenTable's 'lunch', and the company would not be able to survive, as the company didn't truly have a 'moat' around it's business model. But loyal OpenTable users like me, knew that would not be the case, and after seeing competing reservation systems like SeatMe, became even more bullish on the Opentable concept.
- OpenTable had outcries from restaurant owners similar to the ones Yelp has now with small business owners, though not to the same extreme. This was around the costs needed to have OpenTable at the restaurant, along with the way some of the reviews posted by patrons were filtered.
- OpenTable sported bloated fundamentals, which included a P/E ratio that was over 100 for most of its existence as a publicly traded company, just like Yelp does. It also took OpenTable 10 years to post it's first profit.. again, just like Yelp.
- Bears were shorting OpenTable stock, betting on it to fall, with a short interest as high as 20% of the float just 5 months before the buyout. Bears are making a similar bet on YELP, with 16% of the tradeable float being sold short.
A Couple More Thoughts on a Yelp ( $YELP ) Buyout
- Many have cited the rumors of Yelp being put up for sale as sign of weakness. And in most cases it could be construed that way, but I feel this case is the exception. First, Yelp being taking into the fold by a bigger entity will allow it to focus more on it's business, and would likely alleviate some of the pressures that has caused so much discourse with small business owners. Second, I actually think it could entice a higher buyout price ,as companies who have been waiting around for a lower share price on Yelp ( and desperation), are forced into a bidding war now that they think this unique asset is going to a competitor.
- There has been quite a bit of the bearish/negative talk on social media, and seems most are from the small business owners - I can only imagine the frustration. Nothing worse than busting your butt for years to build your business, and see a few negative reviews hurt your brand. I get it. They alway say one good experience and the customer tells 1-2 people, where a bad experience has a customer sharing it with 10-20 people. But does an online review from someone you do not know have the same impact as a friend? I don't think so, and why I think quantity matters just as much as quality when I look at reviews on a small business on Yelp. Similar to Amazon reviews, Movie reviews on IMDB, or any other site that offers users reviews , I assume some of the reviews are fakes, a competitor, or someone who is just having a bad day. Does that encompass all of Yelp's 77 million reviews? No way... 5-10%? Likely. More than that? It's possible. Even at 20%, I still think the Yelp reviews are an indispensable tool to make decisions. And 11 years of history on an establishment cannot be bought by any other means then through acquiring Yelp itself.
So whats the asking price for Yelp and from who?
Who
First would be Google, although it's pretty apparent the CEO and co-founder of Yelp Jeremy Stoppelman is not a fan of Google - just takes a few minutes of looking at his Twitter feed(check his retweets) : https://twitter.com/jeremys . Yelp also spurned a previous offer from Google ( $GOOGL ) for $550 million back in 2009. But for the right price, it would be a great fit. It would also ensure Yelp gets to the top of the indexes, and would be a great integration into Google Maps and Waze, the latter of which has already started some really neat advertising on the app..
Next would be Priceline Group and Facebook. Yelp would be a nice addition to either. It would be a boon for Facebook's ( $FB ) local advertising, and for Priceline, would give be another great asset to add next to OpenTable.
After that it could be a possible China company looking to get entrenched into the U.S. like Alibaba ( $BABA).
Price
To put it in perspective I will use the OpenTable example from last year:
Priceline Group ( $PCLN ) bought OpenTable ( $OPEN ) for $2.6 billion, which was a 46% premium to where the stock was trading at the time . It valued the stock at 11.4x's it's 2014 forecasted revenues.
Yelp currently trades at 6.1x's it's 2015 forecasted revenue, if given the same multiple for a buyout as OpenTable, it would imply a $6 billion offer, or $88.26 per share.
Of course that is a high, and very unlikely to be the price, but I can see a buyout in the range of $60-72.
It's also helps put things in perspective to see the growth Yelp has had since the $550 million offer from Google ( GOOGL ) back in 2009 . SInce that time it has grown revenue from $25 million to $550 million(forecasted) ,thats over 2200% growth. And the company is still on track to grow revenues 50% in 2016. All things that I think most overlook.
In summary, I think Yelp ( $YELP ) is going to be bought out before the summer ends, and will continue to play calls for a possible payday on the eventual news.
Happy Trading!
- JB
Great read bobber