- WHAT'S FOR SALE: A business that is facing declining revenue if it doesn't grow its salesforce in perpetuity. YELP's model is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition, which is the overwhelming majority of its customers annually. The issue is that its TAM isn't large enough to support its model. That has manifested into a persistent decline in salesforce productivity, which is now devolving into a mounting exodus of its sales reps (see note below). The latter means the story is going to turn much sooner, and get much uglier, than we initially expected. See note & deck below for detail.
- WHO'S THE BUYER? There are very few who can afford, and much fewer (if any) who would be desperate enough to consider. Remember that in any M&A transaction, the would-be seller has to open its books. If we all can see YELP's attrition issues in its public data, any would-be acquirer would see it in its private data. Combine that with the negative goodwill surrounding YELP's alleged business practices, and the likely sell-off of the acquirer's stock on the news, and it's basically Russian Roulette for any acquiring CEO (except there isn't an empty chamber).
- WHAT THIS MEANS: This could just be a manufactured story to squeeze the shorts. If not, then management is just terrified. The company went public in 1Q12 and now may be looking to sell in 2015 at what was a 52-wk low before yesterday's headlines. Management may finally be coming to the realization that its model is unsustainable. We suspect the wake-up call was what we believe was a sequential decline in its salesforce in 1Q15 after targeting 40% sales-rep growth for 2015 (see note below). Mgmt may be hoping to eject before the model starts crashing, but we doubt it can find a buyer. If we're wrong, let's hope none of us are long the acquirer.
For supporting detail, see below for our most recent deck and note . Let us know if you have any questions, or would like to discuss further.
Hesham Shaaban, CFA
YELP: Short Thesis Update Deck & Replay
Deck: [click here]
Replay: [click here]
YELP: The New Major Red Flag (1Q15)
04/30/15 08:53 AM EDT