Yelp Inc (NYSE:YELP) is down over 30% year to date and is looking attractive. We believe the user review site could be a key acquisition for Yahoo! Inc. (NASDAQ:YHOO). Yelp trades at just over $1 billion in market cap, where Yahoo carried some $7.5 billion of cash on its balance sheet as of last quarter.
In Yelp’s most recent quarterly results the review company narrowed its loss, but is still operating in the red by three cents a share, compared to a loss of $0.24 a share for the same quarter last year. Revenue showed solid trends, up over 60% from last year. Yelp is also expanding into Europe and recently purchased the European review website Qype for $50 million.
Major investments in Asian companies have helped prop up Yahoo with IP and patents, but future value will come from a major turnaround or strategic acquisitions. The sale of around half of its Alibaba stake yielded the company $4.3 billion in net proceeds, with the idea that Yahoo would spend about $3 billion on repurchases or dividends, leaving a good amount of cash for possible acquisitions.
Yelp appears to be a better buy than Google or Facebook for investors, but we believe a Yahoo-Yelp combo might be an even better buy. Yahoo trades at just 5x trailing earnings compared to its historical P/E of 30x, but the low P/E is indicative of the tech company’s growth concerns.
In its latest quarterly financials, the new Marissa Mayer-led Yahoo beat EPS estimates of $0.24 by a whopping 11 cents a share. We still find it difficult to jump onto the bandwagon when the company is expected to grow EPS over the next five years at only 10% annually, while Google (14%) and AOL (20%) are expected to fare so much much better. We believe Yahoo needs a key acquisition to help take its growth to the next level and attract investor interest. Marissa Mayer's key initiative is to increase the user experience, and Yelp could surely help with that.
Yahoo has been getting left behind as of late though, as Yelp has announced partnerships with rivals Apple and Microsoft. Yelp's Microsoft partnership includes the use of Yelp reviews to inform and drive certain search results. Yelp also managed to secure a partnership with Apple Inc (NASDAQ:AAPL) for allowing check-ins as one of the features on iOS mobile maps. This comes on top of the integration with Apple’s personal assistant voice service Siri, and should be a big plus as Apple just launched its new iPhone 5.
Initial supply issues with the iPhone 5 in the U.S. are beginning to be ironed out which should allow even more people to get their hands on the new smartphone. Although the availability numbers of iPhone 5 phones in retail stores—84% for Sprint, 54% for AT&T and 24% for Verizon—might seem weak, it is a vast improvement from previous levels. The idea of the "check-in" was first introduced by Foursquare and has since been adopted by Facebook and Google. While Yahoo has the ability to partner with Microsoft for a few years, where Microsoft's technology now powers Yahoo's search results, we'd prefer it if the company searched for more growth opportunities.
Yahoo should be able to continue to see revenues from advertising, but the question remains: what will drive growth beyond that? Other major search competitors include Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT), which are slowly pushing Yahoo out of the game. Google and Microsoft (Bing) now own over 80% of the search market share, with Google owning 66% and Microsoft 15%.
Some headwinds for a Yahoo-Yelp combo include the fact that over 80% of Yelp's traffic comes from Google. The other slight hesitation might be that Yelp is seeing an increased number of users using mobile devices, up to 25% of its unique visitors for last quarter, and one of the leaders in the mobile operating game is Google, with its Android operating system. So does that mean Google should buy Yelp? Google failed to acquire Yelp a couple years ago and ultimately settled for Zagat—Google had offered to acquire Yelp for half a billion dollars, but Yelp walked away.
This does not mean that Google could not purchase Yelp now, but we believe that Yelp would be much more meaningful to a struggling company like Yahoo. With Google’s latest EPS announcement missing on both earnings and revenue, we feel the company has other issues to address, including getting Motorola fully integrated and profitable.
Third Point remained Yahoo’s top fund shareholder in 2Q 2012. Third Point took its initial stake in 3Q 2011 and was instrumental in ousting former Yahoo CEO Scott Thompson. Third Point owned 70.5 million Yahoo shares, or around 6% of the company’s shares. As Thompson was shown the door in May, it appears that many funds were excited about the turnaround prospects of Yahoo, as ten had 4.8% or more of their 13F portfolios invested in the company. We are excited about the turnaround opportunity that Yahoo has, but would really like to have more color on their strategic plans, specifically on how they plan to use the Alibaba capital going forward. Check out all the funds loving Yahoo.
Microsoft and Yahoo are on the low end with respect to earnings growth, each with a 5-year CAGR of 10%, while Apple is at 20% and Google is at 14%. Part of what makes Microsoft attractive is its 3.0%+ dividend yield, while Yahoo's key factor is its valuation. Trading at only 5x earnings, Yahoo boasts the lowest PEG ratio (0.4) of all the companies we've discussed here.