Here's Morgan Stanley's Investment Thesis On Yelp

Yelp Inc YELP has started taking steps to improve its s business mix and profitability, lending upside to the long-term estimates, Morgan Stanley’s Brian Nowak said in a report. He maintained an Equal-weight rating on the company, while raising the price target from $29 to $34.

Yelp is making a strategic shift in its business mix by putting more efforts to promote higher-margin self-serve advertising, while activity diversifying away from its “headcount intensive” direct sales product, which currently contributes the lion’s share of the company’s ad revenue stream, analyst Nowak mentioned.

Impact Of Efforts

The new management team had mentioned this strategic shift during the Q2 earnings call, saying that they were “experimenting to find the optimal mix of product and marketing in self-serve,” while adding that self-serve could be “a meaningful source of customer growth, operating leverage, and profitable growth over the long run."

Nowak expects faster local advertiser adoption with the roll-out of the lower-dollar commitment self-serve cost per click ad units. This is important because several SMBs consider the current average of ~$409 per month for Yelp’s product as high.

“We see this change in strategy leading to higher profitability (as Yelp slows its direct sales force growth) … we see this pivot toward a less labor insensitive model leading to higher long-term adjusted EBITDA margins and earnings power,” the analyst commented.

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