You know I was a big advocate for YELP, holding it from $21 to $31, back down to $14, then up to $27. Alongside WNR, it has been my biggest winner for 2012. However, recent events in the social media space has given me caution with YELP, specific to lock up periods expiring and out of sync valuations. Without a doubt, YELP is certainly a takeover candidate, but so is everyone else. Aren’t they?
Have a look at some price to sales ratios in the social media space, courtesy of The PPT.
Now let’s sort by market cap.
Notice anything odd?
Fucking YELP, PANW and LNKD are trading at extreme p/s valuations. All three stocks can get cut in half and still be overvalued, when compared to some of the bigger companies in the space. 5x sales seems to be a reasonable place for these stocks to base out. If that’s the case, The FuckBook aka Facebook is heading to $10.
Naturally, we need to give a premium to smaller cap names, due to chances of a buyout. Also, in the case with YELP, it is growing at a 70% clip. I think a “fair” price to sales ratio for YELP, given the compression of valuations in the space, is about 7x sales–matching the valuation of TRIP–another Fly favorite.
In short, I believe YELP is being propped up by hopes and dreams. If anything derails for YELP, if GOOG develops a kick-ass FREE app for Zagat, the stock is heading for the low teens, maybe $12.
Being that I was such a big supporter of the name for so long, I felt it to be an appropriate gesture by me– to offer an explanation– as to why I am no longer invested in YELP or remotely interested.