Attempting To Clear Up The Confusion Around Yelp's Q3 Report

After Yelp Inc YELP released third-quarter results, KeyBanc Capital Markets said the online name looks attractive despite guidance that appeared "soft." 

Analyst Brad Erickson maintained an Overweight on Yelp with a $54 price target. 

In pre-market trading, shares of Yelp were down 1.15 percent at $45.50, on top of the 1.48-percent retreat Wednesday.

The  company reported above-consensus EBITDA and also guided roughly in line with its previous outlook on a comparable basis, Erickson said. (See Erickson's track record here.) 

Yelp's acqusition of Eat24 proved more dilutive than initially expected, but Erickson said accretion will take hold beginning in the first quarter of 2018.  

KeyBanc noted a likely EBITDA headwind in the single-digit millions built into fourth-quarter guidance. Yelp affiliate revenue from GrubHub Inc GRUB is projected to be $8 million in 2018, driving EBITDA of $6 million to $7 million for the year, Erickson said. 

Yelp expects the 30-percent EBITDA outperformance in this quarter to be replicated in the next, provided the churn management team executes well, according to KeyBanc. 

"However, given the last two quarters of especially high net adds, we think the churn management efforts set up 2018 to drive significant margin flow-through from those recently sold customers," Erickson said. 

The firm lowered its revenue estimate to reflect the removal of Eat24, but raised its EBITDA estimates in light of the third-quarter outperformance and  high-margin referral fees becoming more accretive in 2018.

KeyBanc said it would buy the weakness, given the company's muted guidance and the underappreciation of Yelp's margin expansion opportunity. Additionally, ongoing synergy opportunities exist with the GrubHub partnership, Erickson said. 

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