Tech

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

David Einhorn is giving Yelp a five-star rating. His bet on the stock may not deserve such high marks.

Einhorn's Greenlight Capital disclosed late Monday that it built a stake in the $1.7 billion customer-review website during the first quarter, piling in at an average price of $21.16, or nearly half the stock's lifetime average of $42.13. Yelp's shares surged as much as 5.4 percent to $22.67 on Tuesday, buoyed by Greenlight's vote of confidence. Still, the firm's reasoning for investing in Yelp leave room for doubt. 

For starters, Greenlight says that if Yelp executes its current plan, it'll double revenue by 2019 and grow Ebitda to $300 million, at a margin of 35 percent. While the revenue figure looks achievable, nine analysts polled by Bloomberg have mean and median estimates of $251 million and $241 million, respectively, for Yelp's 2019 Ebitda, at a much lower margin of 20.4 percent. 

Useful, Funny, Cool?
David Einhorn has a more bullish outlook on Yelp's future than the majority of Wall Street
Source: Bloomberg

It's certainly possible that the rest of Wall Street can't see what Einhorn sees in Yelp. But the company's decelerating revenue growth and increased competition from competitors including Google, Facebook and OpenTable argue for lowering one's expectations, if anything. 

Not So Fast
Yelp's revenue growth has decelerated markedly as it has expanded. When will it stop?
Source: Bloomberg

Greenlight also asserted that "a bidding war could emerge" if Yelp's board decided to auction the company. That's puzzling, because it did explore a sale last May (when it was worth roughly $3.5 billion), and then pulled the plug in July despite having "several interested suitors." As my colleague Tara Lachapelle wrote earlier this year, some believe that process was halted because Yelp wasn't receiving enough interest from buyers, with price a potential sticking point.

Considering the company's ensuing slide, any suitor with an unwavering appetite for Yelp could have made fresh advances, but alas, they haven't emerged.  That's in part because it's truly unlikely that Yelp CEO and co-founder Jeremy Stoppelman will suddenly have a burning desire to sell the company he created for a fraction of its recent worth. 

Separately, Greenlight addressed the upcoming release of an unflattering documentary on Yelp, "Billion Dollar Bully," stating that it won't impact the firm's investment thesis. Even if it can't be proven that the company removes positive ratings when paying customers cancel their services (as the movie's trailer claims), there's a real chance that fallout from the film could dent the company's reputation among small businesses, the key source of Yelp's revenue.

Not everyone is subscribing to Greenlight's school of thought by following the firm into Yelp, but fewer are betting against it -- that's a positive sign. Short interest in the company has dwindled to roughly 3.2 percent of shares on issue from a peak of 17.4 percent in February last year. 

Fewer Jeers, More Cheers?
The number of investors betting against Yelp has fallen, especially over the past year
Source: Markit, Bloomberg

To date, though, Greenlight gets a two-star rating for its bet on Yelp, with props for conviction and (possibly) timing. A few quarters of solid earnings, beginning with first quarter results this Thursday, could lead to a revised review. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net