Yelp Story Is Now About Catalysts Vs. Competitive Pressure

Goldman Sachs sees the Yelp Inc YELP story as one of the positive near-term catalysts pitched against long-term competitive pressure. The firm believes long-term risks will cap Yelp's multiple for now.

As such, Goldman assumed coverage of Yelp with a Neutral rating and a $42 price target.

At last check, Yelp shares were sliding 1.19 percent to $43.85.

Analyst Christopher Merwin noted that Yelp reported a very strong second quarter, characterized by a double-digit acceleration in traffic growth and PAA net adds reaching the highest since first quarter 2016.

The analyst also noted that Yelp announced a partnership with GrubHub Inc GRUB, which allows Yelp users to order from GrubHub restaurants on the Yelp platform.

With restaurants being Yelp's largest category by traffic, Goldman Sachs thinks the near-term economics of the partnership will be beneficial to Yelp. The rationale behind the thinking is that cash flow per order will be higher than it was when Yelp fulfilled delivery orders through Eat24, which GrubHub has since then bought.

See also: Yelp's Valuation Earns A Poor Review With This Analyst

That said, the firm believes the long-term economics may not be as compelling if GrubHub owns the transaction and retains customers that discover its service through Yelp.

Additionally, the firm said "Request-a-quote" could drive upside in 2018 and beyond. The firm expects quote volume to reach 14 million in 2017 after seeing a 50-percent sequential improvement in the second quarter.

"Assuming steady double-digit volume growth through 2019 and monetization of $20 / lead, similar to ANGI HomeServices, request-a-quote could generate $350mn+ in revenue," the firm said.

The firm believes the product provides option value to the stock.

Meanwhile, the firm believes Yelp's future growth will be influenced by many different competitors, as it operates across all local advertising verticals. The firm said it is encouraged by Yelp innovating in its home services through request-a-quote, and restaurants category through Yelp reservation.

That said, the firm believes in the long run, it may be difficult to keep up with the pace of innovation by more specialized vertical competitors.

_______ Image Credit: By Nancy Pelosi from San Francisco, CA [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons