Why Yelp Stock Is Finally An M&A Target

- September 1, 2016

YELP stockYelp’s (NYSE:YELP) business and valuation alone warrant a downgrade. YELP stock has surged nearly 60% since we initiated coverage with a “Buy” rating.

We realized that Yelp’s business had improved, and that after a surge among big competitors entering its segment, it became clear that Yelp would in fact survive and thrive.

No, Yelp will never be Facebook (NASDAQ:FB) or Alphabet (NASDAQ:GOOGL), but it can still build a solid business by doing what it does and remaining a niche service.

However, now that Yelp stock has soared there is no longer a great deal of short-term upside. Still, what Yelp has managed to accomplish is worth celebrating.

It has become clear that the big boys of tech can not run over Yelp, or steal its small piece of the pie. Given Yelp’s network with local businesses, users, and with growing services, I think for the first time Yelp is a legitimate M&A target.

Hasn’t Yelp always been an M&A target?

Some have predicted a Yelp acquisition since its IPO in 2012. I’m sure that when it does happen those same who logically explained why back at $70/share will celebrate their amazing call.

Thing is it never made sense for big tech to acquire Yelp, not until now. There was a time when Yelp’s entire business model was being called into question, with allegations of fake reviews and damn near extortion of small business owners. About that same time Facebook and Google were launching similar services.

Fast forward 16 months and Yelp is growing at a respectable rate of 25%. More importantly, Yelp is growing its local advertising and transactions businesses at an even faster rate, which suggests accelerated growth in the future.

Specifically, Yelp’s local advertising accounts increased 32% in its last quarter. As we all know, local advertising and local relationships is important to big tech. Given that Yelp has proven its business to be sustainable and has now accumulated a Google-like portfolio of reviews, a company like Microsoft (NASDAQ:MSFT) or Verizon (NYSE: VZ), after buying AOL and Yahoo, would see such its longevity and presence as a valuable commodity.

However, the real gem is Yelp’s transaction business. This is where Yelp allows users to book reservations, and is essential to the growth of its local advertising business. In Yelp’s last quarter, this transaction segment reached $6 billion, growing 50% year-over-year. While Yelp does not report these transactions as revenue, it is clear that Yelp has succeeded in a booking/reservation business that Facebook and Google have been working tirelessly to perfect.

Last but certainly not least, Apple already has a relationship with Yelp’s reviews, and relies heavily on those reviews for its map service. The last thing it wants is to lose that connection to a competitor. Not to mention, local advertising and transactions are two areas that would surely assist Apple to grow its Services segment.

Why Yelp stock is now an M&A target

All things considered, the likes of Facebook, Google, and Microsoft probably thought Yelp would be easy to crush, especially with all the controversy in years past. However, it has not worked out that way at all. Yelp is relevant, and while a niche service, adding Yelp’s existing services to the likes of Google or Facebook could prove valuable for two companies that have demonstrated a desire to own standalone applications that coexist in a larger overall network.

The fact that Yelp is a top mobile application makes it an M&A target for big tech. When you incorporate the success of its reviews business, local advertising, reservations, and its longevity, there is no question that Facebook, Google, Microsoft, and Verizon (among others) now have Yelp stock on their buy list. For this reason, BNL Finance keeps Yelp stock on its “Buy” list.




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