Morgan Stanley Downgrades Yelp, Says 'Bear Case Is Playing Out'

In a report published Wednesday, Morgan Stanley analyst Brian Nowak downgraded the rating on Yelp Inc YELP from Overweight to Equal-weight, while reducing the price target from $53 to $25. Continued mis-execution by Yelp's management, lower sales productivity and the company's decision to eliminate its highly-profitable branded ad business are expected to put increased pressure on margins. Although the company's 2Q net sales hiring of over 150 was in-line with expectations, Yelp reduced its full-year hiring plans guidance from 40 percent growth to 30 percent growth due to increased hiring competition. In the report Morgan Stanley noted, "This lower 2H hiring combined with YELP's new lower full-year '15 rev guidance implies local ad dollars per rep growth will slow to ~6% growth in 2H, from ~13% in 1H." Increased churn from Yelp's high quality sales people, along with the lingering effects of Yelp's unsuccessful reorganization efforts in 1Q15, are expected to pose a "structural challenge" to the company's long-term salesforce productivity. Analyst Brian Nowak expects the company's plans to eliminate its branded advertising business by the end of this year to result in lower EBITDA margins. "At a higher level, this pivot in brand strategy and repeated mis-execution on the local business (sales force re-org and reverse re-org in 1Q) make us incrementally cautious around management's strategic outlook," Nowak added.