Yelp Inc. shares soared to a new 52-week high Thursday, after an earnings beat defied pessimism about the online-reviews site’s move to shorter-term advertising commitments.
Yelp YELP, +26.65% gained as much as 30.4% in Thursday’s session before closing with a 26.7% gain at $48.33, the third-largest one-day percentage gain in Yelp’s history. The move follows the release of second-quarter earnings Wednesday afternoon, which beat estimates and showed the biggest quarterly increase in advertisers Yelp has ever reported.
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The move reversed a downward trend for Yelp, which dropped 14% after its fourth-quarter earnings report in February and 7.8% after first-quarter earnings in May. Overall, Yelp stock had been down 9.1% in 2018 through Wednesday’s session, as the S&P 500 index SPX, -0.14% had gained 6.9%.
Concerns had grown because of Yelp’s move to what it calls “non-term” ad offerings, which don’t require advertisers to commit to thousands in ad purchases over a long period of time. Analysts had doubted that the approach could spark gains for Yelp, but the company easily beat earnings expectations for the second quarter and added 17,000 new accounts, by far the most in a quarter and well higher than the 9,000 analysts expected on average.
Analysts responded positively to Yelp’s report, with at least 11 of the 27 tracked by FactSet increasing their price targets on the stock Thursday morning, though the increases were almost all by $1 or $2 a share. Most of the analysts were not convinced that the turnaround is ensured and solid despite raising estimates, as the new contract approach means Yelp has to constantly execute on the ad-sales side to meet expectations.
“[It] is tough to have an upside view given rising sales execution requirements necessary to replace the understandable rising churn from no-contract term sales,” KeyBanc Capital Markets analyst Brad Erickson wrote. He raised his estimates for revenue and Ebitda, but maintained a “sector weight” rating with no price target.
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Most analysts pointed to a relief rally as likely, but little change in long-term views. Bears on the stock can still point to concerns about user metrics, repeat ad-buyer rates, guidance and other issues, MKM Partners Managing Director Rob Sanderson said in a note.
“This is not the statement quarter that might decisively turn views,” wrote Sanderson, who has a buy rating and $56 price target on the stock. “However, we do think that transition concern on non-term commitments should reverse.”
The general thesis from analysts was that Yelp shares had probably been punished too much this year, but it will take another quarter or two to fully prove that the new approach will be more lucrative and sustainable.
“It may take one to two more quarters to allay concerns around the non-term contract transition, but the initial data are promising — Yelp’s sales force is more productive, it is easier to advertise on Yelp, and contribution profit remains positive,” Raymond James analysts wrote. They have an outperform rating and $52 price target on the stock.
Overall, 13 of 27 analysts tracked by FactSet have the equivalent of a buy rating on Yelp stock, while 12 rate it a hold and two call the stock a sell. The average price target rose from $49.55 to $50.64 with Thursday’s changes.