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Yelp Jumps on Citigroup Upgrade to Buy From Neutral

Yelp should benefit as restaurants and other businesses reopen, says an analyst at Citigroup.
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Yelp  (YELP)  should be experiencing more top-line growth and more robust operating leverage ahead, according to a Citigroup analyst, who upgraded shares of the online review company to buy from neutral.

The stock was climbing 5.1% to $39.09 on Tuesday.

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Analyst Jason Bazinet, who also raised his price target to $48 from $33, said in a research note that he saw several opportunities for Yelp, including a recovery from the COVID-19 pandemic as restaurants and other businesses reopen.

The analyst said he sees Yelp generating more revenue from leads within the services segment, and he expects more sales to migrate to the self-serve channel, lowering sales expenses. 

Prior to the pandemic, Yelp typically required additional sales employees to grow, Bazinet said.

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"In 2002, Yelp had 763 sales reps," he said. "By 2019, the figure was 3,844. But, the revenue productivity per sales person has hovered between $200K and $290K per rep per year."

The analyst also expects lease costs to moderate as the company subleases more of its office space.

"As such, we see better top-line growth and more robust operating leverage ahead," Bazinet said.

Yelp "has no debt and generated cash flow even during 2020 when local advertising and local businesses were under duress," he said,

Also, the analyst said Yelp "has a handful of initiatives that should benefit the top-line and allow the firm to see EBITDA margin expansion." 

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Bazinet noted that COVID-19 "took a heavy toll on Yelp," with revenue contracting over 30% in the second quarter of 2020 and falling 13% in the fourth quarter.

"Yelp responded by reducing its labor force," he said. "Sales reps declined from 3,600 in 4Q19 to just 2,000 in 4Q20. And, total employees fell by even more."

Steep staffing cuts, he added, allowed Yelp to generate positive EBITDA even during the depths of the COVID crisis in the second quarter of 2020 

"Indeed, by 4Q20, Yelp generated 26% EBITDA margins, a record," Bazinet said.