Aegis Isn't Sold On Yelp's New Business Model, Downgrades To Sell

Yelp Inc YELP is making changes to its business model but at the expense of near-term metrics, according to Aegis Capital. 

The Analyst

Aegis Capital Corp's Victor Anthony downgraded Yelp from Hold to Sell with a price target lowered from $45 to $34.

The Thesis

The bearish case for Yelp's stock is based on the company's decision to shift away from yearlong contracts, Anthony said in the downgrade note. While the decision to offer "good-'til cancelled" contracts did result in a more than doubling of the rate of net advertiser additions in the first quarter, average revenue per user trended down in the quarter, the analyst said.

For the first time in more than two years, Yelp's earnings report showed average revenue per account that declined slightly by less than 1 percent year-over-year to below $420 per month versus $437 in the fourth quarter.

During Q1, Yelp's account churn also rose from an estimated 29,000 in the fourth quarter to 37,000, the analyst said. Monthly churn rose from an estimated 6-7 percent in the prior quarter to 8 percent in Q1. 

The analyst's math suggests ARPU for new accounts Yelp added in the first quarter was $322 per month, which is 26 percent below the ARPU for existing accounts and 23 percent below the blended average of $420, Anthony said.

The lifetime value of Yelp's account base has "essentially diminished" by around 25 percent, which warrants a bearish rating, according to Aegis. 

Price Action

Shares of Yelp were trading lower by 3.26 percent premarket Wednesday. 

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