Takeaway: YELP's recent drawdown suggests the street knows that the YELP long trade is ending, but it still may be too early to put the short back on

KEY POINTS

  1. 2H16 IS A TOSS-UP:  The 2016 story can be boiled down to the algorithm change & self-serve Local Advertising account (LAA) growth.  The algo change is just a one year ARPA benefit that should extend through 4Q16.  Self-serve has already proved to be is a wavering growth driver, but doesn’t have a material comp in 2H15.  YELP’s guidance implies a deceleration in new LAA growth vs. 1H16, so YELP should be able to hit consensus Local Advertising estimates barring an acceleration in attrition (see scenario analysis below).  However, we can't rule out the latter since self-serve accounts aren't locked into annual contracts.  Net-net, we're expecting a small top-line beat for 3Q assuming comparable attrition to 2Q16.  The 4Q guide hinges on its 3Q results, but it really comes down to whether mgmt would rather curb expectations into 2017 or stem the recent drawdown in its stock.  With a new CFO in place, that's really a toss up.
  2. 2017 LOOKING MUCH WORSE:  Outside of the algo change/self-serve, YELP’s core business has continued to deteriorate through 1H16.  New LAA growth has continued to track below the rate that YELP has been hiring reps, and that is despite self-serve inflating that metric.  Note that the algo ARPA tailwind lapses in 1Q17, which is also when YELP will start lapping its self-serve promotions, so its core Local Advertising segment will revert back to the former LAA growth story.  Consensus is looking for 25% y/y growth in Local Advertising revenue in 2017, however YELP is only planning to increase its salesforce by 20% by the end of 2016.  That said, if YELP doesn't ramp its salesforce growth above that rate in 2017, then consensus is inadvertently calling for a considerable acceleration in salesforce productivity (new LAAs/rep on a 1Q lag) into positive y/y growth in 2017 vs. declines dating back to 4Q15, and flat growth in the 3Q15 and 2Q15 (0.2% and 0.6%, respectively).  We’re looking to revisit the short closer to the 4Q16 release, if not sooner.

YELP | Thoughts into the Print (3Q16) - YELP   New vs. Lost Scenario 2H16

YELP | Thoughts into the Print (3Q16) - YELP   New LAA scenario analysis 2Q16

Let us know if you have questions, or would like to discuss in more detail.  

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet