Yelp Downgraded At Citi On Modest Guidance, Reduced Probability Of Future Earnings Surprise

Yelp Inc YELP share prices are up roughly 36 percent since the company reported Q1 earnings on May 5, which beat earnings estimates and showed strong gains on growing ad revenue.

Citi’s Take

Citigroup’s Mark May downgraded Yelp from Buy to Neutral while raising the price target from $27.00 to $31.00.

May’s downgrade resulted for four reasons:

• Recent share price outperformance despite consensus forecasts remaining unchanged
• Modest guidance on advertising revenue
• Margins remain under pressure
• The analyst’s estimates are below consensus

Related Link: Why Yelp Could Have A $3 Billion Revenue Stream In The Future

Recent Share Price Outperformance

“Share price outperformance since 1Q earnings has been driven entirely by a 40 percent expansion in the company's EBITDA multiple… while consensus forecasts have remained unchanged,” said May. The analyst noted Yelp now trades in line with comps.

Modest Guidance

Although Yelp performed very well in growing Q1 ad revenue, management “downplayed the sustainability of the trend.” Modest guidance reduced the likelihood and magnitude of further upside surprises, stated the Citi analyst.

Additionally, May pointed out both user mobile and transaction revenue growth slowed more than expected in Q1.

Pressured Margins

Guidance and expectations, which “assume a significant increase in margins/leverage in 2H16,” could lead to earnings risk while margins remain under pressure stated the analyst.

According to TipRanks, Mark May is among the better analysts covering Yelp with a 63 percent success rate with a +10.3 percent average return per recommendation. The analyst is ranked 196 out of 4,057 analysts.

At time of writing, Yelp traded at $28.59, down 2.06 percent in Wednesday’s pre-market.

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