Morgan Stanley Raises Yelp Price Target, But Still Concerned About Growth

Morgan Stanley’s Brian Nowak expressed caution regarding Yelp Inc YELP, given the concerns regarding client and ad budget growth beyond 2016. He maintained an Equal-weight rating on the company, while raising the price target from $19 to $26.

The company is expected to report Q2 earnings after Tuesday's close.

Improved Ad Targeting/Serving

The analyst expects Yelp’s improved ad targeting and serving to drive more dollars per account, as well as higher earnings power, a trend that started in 1Q16 and has continued in 2Q16.

Nowak believes the improved ad serving would lead to 5 percent year-on-year growth in spend per account in 2016.

“We see this higher spend leading to accelerating Y/Y local ad revenue (in part because of easing comps),” the analyst mentioned.

Related Link: Recode: Google Is Finding Ways To 'Piss Off' Yelp And TripAdvisor

The adjusted EBITDA estimates for 2016 and 2017 have been raised to reflect high incremental margin on advertising dollars, as well as higher earnings power.

Growth Concerns

However, the cautious stance is based on concerns into 2017, when Yelp begins to lap the one-time ad format and serving improvement.

Nowak pointed out that “while Yelp's algorithm changes this year are leading to a one-time lift in ad spend per customer, we continue to question the company's ability to sustainably grow its ad spend per customer.”

The analyst also expressed concerns regarding the company’s long-term sales force efficiency and ability to drive higher net account addition.

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