Yelp's Bear Case Has 40% Downside, Morgan Stanley Warns

Shares of Yelp Inc YELP are down 30 percent year-to-date, and there may still be more to go. Morgan Stanley’s Brian Nowak maintained an Equal-weight rating for the company, with a price target of $19.

Sales Productivity Going Down

Analysis shows that Yelp's sales force productivity has been declining steadily, from as high as 54 percent to 16 percent year-over-year over the past couple of years, Nowak said.

Even after excluding the sales force reorganization in 1Q15, sales force productivity has declined by an average of around 27 percent year-over-year per quarter over the last two years. “In effect, local account growth continues to be more difficult for Yelp,” Nowak wrote.

“Yelp's growing absolute customer churn from a growing customer base also makes net new account additions ever more difficult and labor intensive,” the analyst commented. He added that there is a need to continue to hire more sales people to grow the client base, which could limit long-term platform scalability and earnings power.

Below Street 2016 Non-GAAP EBITDA

The non-GAAP EBITDA estimate for 2016 is at $8mn, which is 9 percent below the consensus. There is a risk of revision in the second half of the year.

Although the price target is unchanged, the bear case assumes sales force productivity deteriorates, which results in a $12 value per share, reflecting 40 percent downside, Nowak commented.

Image credit: Nan Palmero, Flickr