Einhorn Reports Position in $YELP; Shares Soar in the After-Hours

David Einhorn, in his Q1 letter to shareholders, announced a position in the beleaguered social media outfit dubbed ‘Yelp’, ticker symbol for you morons out there: YELP. The core business of Yelp surrounds itself in the ancient criminal traditions of extortion. Much of YELP’s focus is to ‘fish-hook’ restaurant owners into becoming paying customers via advertising or other nefarious services that they offer. Failure to succumb to the YELP hegemony could mean a deleterious drop in their ratings, vis a vie gobsmacking reviews that could wreak havoc upon 2nd rate eateries.

Here is Einhorn’s rationale.

We purchased Yelp (YELP) at an average price of $21.16. YELP is a dominant search and review website for local businesses with roughly 200 million unique monthly visitors and the 21st most popular mobile app in the U.S. The stock has suffered due to missed expectations and anxiety about an upcoming negative documentary. YELP is adding more transaction-based revenue, gradually relocating its salesforce to lower cost cities, and providing more reporting tools to its customers to better illustrate the robust ROI of dollars spent with YELP. If the company executes its current plan, by 2019 it will double revenues and earn $300 million of EBITDA at a 35% margin. A peer group EBITDA multiple would imply a $55 stock price. Alternatively, YELP could pare back and operate only in its top 20 markets – using a similar EBITDA multiple, we estimate 30% upside in this “downside” scenario. We also believe that the company has strategic value and that it has been approached by multiple potential acquirers. Should YELP’s board ever decide to auction the company, a bidding war could emerge. Finally, we’ve reviewed the criticisms raised in the trailer to the documentary and we are comfortable that they won’t have a negative impact on our investment thesis. YELP shares ended the quarter at $19.88. We rate them five stars.

Shares of YELP are higher by 6% in the after-hours, but down 63% over the past two years. This is an unusual position for Einhorn, who typically positions into value stocks. Althought not a very profitable enterprise, YELP’s price to sales valuation is at historically low levels, now under 3x. Back in 2012, whence the social media IPO craze had just begun, YELP traded 21x. Growth has slowed, but is still robust at around 40% year over year. Lastly, out of all the former major social media darlings, YELP’s price to sales valuation is just about the cheapest.

Good luck.