Yelp Has More Questions Now, Morgan Stanley Says

• Yelp Inc YELP shares have plummeted 44 percent since January 4 and are currently trading near their 52-week low of $15.50.
• Morgan Stanley’s Brian Nowak maintained an Equal-Weight rating for the company, while reducing the price target from $25 to $19.
• Yelp’s long-term earnings power is expected to be hit by the costs incurred to expand the company’s user and customer base, Nowak stated.

Yelp reported its 4Q local revenues, which form nearly 82 percent of the company’s total revenue base, short of expectations. The lower-than-expected performance raises questions around the company’s addressable user market as active users across desktop, mobile web and mobile app fell sequentially for the first time, analyst Brian Nowak mentioned.

Yelp is forced to increase its advertising spend in view of its contracting user base. This is expected to have a negative impact on the company’s profitability in the future, Nowak said. He added that the resignation of CFO Rob Krolik adds executive uncertainty and decreases the probability of a near-term strategic action.

Yelp’s EAT34 integration appears to be going well, with 4Q results being strong and in-line, benefitting from the Yelp platform and search integration. Nowak expects these benefits to continue in 2016. The company is also expected to grow its salesforce by 27 percent in 2016 and continue the hiring in 2017.

The revenue estimate for 2016 has been raised by 2 percent, but EBITDA estimate has been reduced by 9 percent. Nowak believes that the cost of growing Yelp’s user and customer base will continue rising, leading to lower long-term earnings power.