Yelp's Valuation Earns A Poor Review With This Analyst

Unimpressed by the valuation of Yelp Inc YELP, Cantor Fitzgerald downgraded shares of the company. The firm believes most of the positives — including the healthy revenue growth across channels, the upside optionality offered by transaction revenue over time and solid second-quarter results reported recently along with a positive outlook — are all already reflected in the company's stock price.

As such, the firm downgraded shares of Yelp from Overweight to Neutral, while it maintained its price target at $44.

At the time of writing, Yelp shares were down 2.35 percent to $45.63.

Analysts Kip Paulson and Martha Lepczyk noted that the company's shares soared 81 percent since it reported disappointing first-quarter results on May 9. Given the rapid rise in the stock prices, the firm believes Yelp is now fairly valued compared to is discounted cash flow-derived price target of $44.

On fundamentals, Cantor Fitzgerald noted that the company's ad revenue growth remains healthy across channels, with a 19.1 percent year-over-year rate in the second quarter, boosted by national sales channel growth of 20 percent and self-serve growth of about 70 percent. The firm expects revenue contribution from these channels to continue to rise over time.

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However, the firm cautioned that retention and sales-force productivity problems could resurface. The firm said an upturn in churn or softness in sales force productivity could cause SMB local ad revenues in any particular quarter to decelerate more than expected.

"While retention/churn has improved with client partner team retention efforts, it's important to note that quarterly SMB local ad revenue could remain choppy in any given quarter as a result of these factors," the firm said.

Meanwhile, the firm believes transaction revenues still offers upside optionality. While noting that transaction revenue is only about 9 percent of revenue today, the firm said food orders on Yelp platform increased about 50 percent year over year in the second quarter. Also, the firm feels the GrubHub Inc GRUB partnership could further boost transaction efforts, with the firm expecting 25-percent increase in the metric over the next five years.