We add Yelp to our series of 2019 market forecasts. Is Yelp moving to its all-time highs or will it continue consolidate around current levels? How is its recent earnings contributing to this? Read this, and more, in our Yelp stock forecast for 2019.
Yelp, an online directory for local businesses, is extremely popular especially in the United States. According to its traffic statistics 91% comes from the U.S., around 1% from Canada, and the remaining 8% from a couple of large West European countries. More than 75% of traffic comes from search engines, primarily Google of course. We will try to include this data in our Yelp stock forecast 2019 as we try to understand growth prospects.
In this Yelp stock forecast for 2019 we apply our COF method: first understand the dominant pattern on the chart, next verify how smart investors are positioned in the options market, only to close with fundamentals and financials.
Yelp stock price: start with the chart
Yelp saw a 5-fold increase 24 months after its IPO. However, Yelp’s stock price came down from 100 USD in January 2014 to 15 USD in January 2016. Since then Yelp’s stock saw a spectacular price increase to 49 USD.
That’s not a surprise as 50 USD is a very important price point for Yelp. As per our 1/99 Investing Principles only 1% of price points on a chart are relevant to investors. For Yelp 50 USD is one of the crucial price points.
As per Yelp’s chart embedded below we clearly see that 50 USD represents the split between the ultra-bullish wave and the bearish with recovery period.
No surprise Yelp is consolidating between 40 and 50 USD in the last 9 months.
Yelp stock price: options market structure
The options market structure which reflects positions of smart investors mostly brings clarification. It helps understand where the majority of bets are placed: higher or lower strike prices as calls or put options.
For Yelp, however, there is not lots of insight we can retrieve from its options market. As per the January 2020 calls seen here we see some larger volume in call options are 50 USD, but no more conclusions we can derive from the options market.
The way we interpret this is that even smart investors are on the sidelines waiting to see what will happen. Arguably, they will start taking positions once 50 USD is broken to the upside, or if it appears that’s not feasible because of continued consolidation or even a breakdown.
In other words, we see a wait-and-see stance.
Yelp stock price: fundamentals and financials
Financials of Yelp are great. Top line revenue has been climbing over the last 5 years as seen on the annual financials table, and earnings are evolving in the right direction.
The quarterly results show a mild increase over the last 5 quarters, both in terms of revenue as well as profits.
Furthermore, the short float ratio is 9%, not really a concerning figure.
That said, also taking the chart and options market setups into account, it all boils down to the outlook of the company which we tend to include as part of ‘fundamentals’.
In the recent quarterly earnings report we see this comment from management about the full year outlook (page 10):
Based on second quarter results and the positive underlying trends across the business, we have updated the Business Outlook for 2018. Full year revenue is now expected to be in the range of $952 to $967 million with Adjusted EBITDA expected to be in the range of $186 to $192 million. Details of the revised Business Outlook appear later in this letter.
This represents a 12% increase in revenue which of course is a significantly lower figure than the 20% to 30% increases of recent years.
One thing that caught our attention: the number of shares outstanding saw a sharp increase at the end of 2014 (uncoincidentally, also when the stock price peaked). In recent quarters there was an increase of almost 10% followed by a decrease of 5%. Nothing significant, but important to keep a close eye on.
Yelp stock price forecast for 2019
All in all what do we conclude for our Yelp stock price forecast 2018?
The chart setup shows giant resistance at current levels, say 49 to 52 USD. If and once broken we can reasonably expect a major move. The opposite is true as well: any break below 40 USD will be a breakdown.
Smart investors in the options markets are in a wait-and-see mode, they likely will not take any major position until a clear price trend comes from the market and/or fundamental update comes from the company.
Financials are great, but the pace of growth is slowing down, unsurprisingly.
Our point of view is that any major catalyst from the market and/or company will result in a breakout, in which case this stock will fill the gap between 50 and 100 USD. So a strong bullish catalyst may bring Yelp to its all-time highs in the coming years. However, absence of this catalyst will likely result in a consolidation around current levels, in the 40 to 50 range, with a probability that the narrowing triangle will be followed (45 to 59 in 2019).