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Steady Increases In Revenue
One critical factor in a stock beating earnings is to have strong topline growth. YELP has been able to produce consistent beats on top and that has translated into a recent beat on the bottom line as well.
The last three quarters saw the company hit positive revenue surprises of 2.2%, 3.4% and 3.2% respectively. The most recent quarter also saw a bottom line surprise of 75% as the company came in three cents ahead of the Zacks Consensus Estimate.
Yelp operates an online urban city guide that helps people find places to eat, shop, drink, relax, and play based on the informed opinions of a community of locals in the know. It offers information relating to restaurants, shopping, food, nightlife, arts and entertainment. The company serves customers in the United States, Canada, the United Kingdom, Ireland, France, Germany, Austria, the Netherlands, Spain, Italy, Switzerland, Finland, and Belgium. Yelp was founded in 2004 and is headquartered in San Francisco, California.
Of the last five reports, the company has posted two earnings beats, two misses and reported in line one time. That isn't exactly a stellar record, but as the company moves towards profitability, investors would be wise to take a deeper look at the stock.
While they are in quite different industries, Telsa (TSLA - Free Report) saw its stock jolt higher as it reached its expected first quarter of profitability. The move higher in the automaker was also assisted by a very large short position in the stock. YELP has seen the number of shares sold short increase from 4.7M at the end of June to 6.6M at the end of July and 7.5M at the end of September. So there is potential for a very large short squeeze should the company reach profitability sooner than expected.
The Next Earnings Report
The company is expected to report earnings on October 29 after the market closes. The Zacks Consensus Estimate is calling for $59M in revenue and a loss of a penny per share. Given that the last quarter was expected to see a loss of four cents a share and the company reported a loss of only one cent a share, this could very well be the quarter that helps push shares higher.
Each of the last two quarterly reports helped the stock move higher. The March 2013 report was a miss on the bottom line of two cents, but the beat on top was more to Wall Street's liking. The stock moved higher by 23.8% in the session following the report. Similarly, the June 2013 quarter saw a move of 23.2% after beating on both the top and bottom lines.
Earnings Estimates Moving Higher
In May the Zacks Consensus Estimate for 2013 was calling for a loss of $0.14 per share. That number ticked higher to a loss of $0.13 per share in July and then to loss of $0.10 per share where the consensus resides today.
Over the same time period the earnings estimates for 2014 have increased from a gain of $0.19 in May to a gain of $0.23 where the consensus sits right now.
The more common metric investors lean on (PE) is not relevant for YELP as the company still has negative trailing and forward earnings. That will change soon as the calendar year 2014 is expected to be profitable. Price to book and price to sales metrics are more relevant, but they show some inflated numbers as investors still struggle to properly value the company that has negative earnings and tremendous growth. Speaking of growth, this should be the focus of most valuation arguments. The company is expected grow revenues 46% in 2014 compared to 7.3% for the industry average. Earnings growth is even better, with 332% growth in 2014 vs. the 14% industry average.
A quick look at the chart shows a stock that is moving higher in a rapid fashion. With earnings right around the corner and potential profitability there to push the stock higher, there could be a massive short squeeze. Average daily volume of 3.4M shares means that there is a little over two days volume of stock that is sold short. Of course earnings days tend to get more liquid than most, but don't be surprised if a sizeable amount of short covering pushes this stock higher into the earnings report.
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.
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