David Einhorn Couldn't Be More Wrong About YelpYELP) ever since the stock was trading below $20. While the firm did not have a big position in Yelp a few months ago, it has increased its stake to roughly $64 million. Although the $64 million doesn’t sound like much given that Greenlight Capital has a multibillion-dollar portfolio, it did make the firm Yelp’s fourth biggest shareholder with 5% stake.
Einhorn’s first quarter investor-letter explained his position in Yelp. In the letter, he explained:
“We purchased Yelp (YELP) at an average price of $21.16.
We've reviewed the criticisms raised in the trailer to the documentary and we are comfortable that they won't have a negative impact on our investment thesis. YELP shares ended the quarter at $19.88. We rate them five stars.”
Clearly Einhorn has benefited considerably from his long position in the stock as Yelp closed at $26.61 in the last trading session. At $21.16, Einhorn had a great margin of safety for buying Yelp, however, investors should not be lured into buying the stock as it will likely give up those gains in the near future. While Yelp was an attractive buy for traders when it was under $20, it is definitely a not a buy right now.
In fact, traders who were proficient enough to accumulate Yelp at under $20 should consider exiting the stock as there is no way the company can sustain its rally or justify its current valuation.
Yelp’s revenue growth has slowed down considerably over the last few quarters. Although Yelp is still reporting double-digit revenue growth, the company has sacrificed profits so as to increase sales and this trend won’t last long.
With Yelps growth slowing down on account of maturation of its business, and increasing competition, Yelp’s revenue growth will fall drastically over the next few quarters. Einhorn’s thesis is based on the fact that Yelp will double its revenue by 2019. However, that seems unlikely as Yelp will have to maintain a CAGR of almost 20% in order to achieve that target.
Amid growing competition and maturing business, achieving such strong growth over a 4 year period seems unlikely for Yelp, which is why I would recommend investors to not blindly follow Einhorn, especially after the recent rally.
Einhorn’s revenue growth projections may seem a little farfetched. However, investors shouldn’t even focus on Yelp’s revenue growth and should instead look at the company’s profitability. Yelp has been losing money ever since it went public and isn’t expected to turn profitable anytime soon. Moreover, with a P/S of 3.45, Yelp is clearly expensive and will not be undervalued even if it does double its revenue by 2019.
Published on Jun 6, 2016By Ayush Singh