Are the suggestions by the activist investor feasible for YELP's management to pursue?
In a surprising turn of events this week, online crowd-sourced review website Yelp Inc (nyse:yelp ) found itself under the scrutiny of activist investor tcs capital management , prompting discussions about strategic alternatives and the potential for a sale.
The news sent yelp shares soaring almost 10% higher at one point as traders rushed to back the optimism. Since its quarterly low point in early May when YELP reported first quarter results, the stock has rallied almost 30% upwards, back near annual highs.Gates Cap Management Reduces Risk After Rare Down Year
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TCS Capital, which disclosed over 4% ownership of Yelp's outstanding shares this week, has raised serious concerns regarding the company's underperformance and believes it is shockingly undervalued.
In a letter addressed to yelp's board , TCS Capital's founder Eric Semler proposed that the review site platform explore a sale to a strategic or private equity buyer for at least $70 per share - a premium of more than 120% compared to Yelp's current stock price.
Alternatively, Semler suggested that Yelp consider a tax-free merger with Angie's List parent Angi Inc (nasdaq:angi ), a move that could potentially create a dominant player in the lucrative $500 billion home services market. Table of Contents show
dissatisfaction seems justified
behind the underperformance
low insider sentiment
Dissatisfaction Seems Justified
TCS Capital's dissatisfaction with Yelp's stock performance seems justified. Over the past five years, Yelp's shares are down by around 30%, significantly underperforming broader indexes and also well below its peak of almost $100 per share in early 2014.
Despite having a widely recognized digital brand, 73 million users, and a colossal 265 million reviews, Yelp trades at remarkably low valuation multiples of 4.8x forward-forecast EBITDA and 8.5x forward cash earnings.
These numbers are even more perplexing considering Yelp's consistent revenue growth, particularly in its home services segment, which has seen revenue increase by 20-25% annually over the past four quarters.
Additionally, Yelp boasts a robust balance sheet with nearly $300 million of net cash and stands to benefit significantly from advancements in AI and machine learning, which TCS believes could enhance the quality and value of its reviews and recommendations.
Behind the Underperformance
tcs capital believes that Yelp's chronic underperformance stems from several key factors. First and foremost, the activist investor points to the complacency of CEO and co-founder Jeremy Stoppelman, who has been at the helm of the company for nearly two decades.
The fund argues that stoppelman runs yelp as his personal fiefdom , despite owning only a 5% stake in the company and lacking special voting rights. Moreover, TCS Capital criticized Yelp's board for its lackluster oversight, with many directors possessing minimal relevant experience or investment in the company.
In addition to the other issues, TCS highlighted concerns with stock-based compensation packages that were awarded to senior management even though share price performance was nothing special.
The most concerning allegation raised was around C-level management potentially engaging in suspiciously timed insider stock sales, which led to multiple class-action lawsuits with settlements totaling over $40 million . These instances of perceived misconduct further erode confidence in Yelp's leadership.
TCS believes skepticism in the market on the stock can be attributed to Yelp's history of missing market expectations, which has left investors and analysts reluctant to embrace the stock.
Low Insider Sentiment
fintel's insider trading report for yelp highlighted that three net insiders have sold stock in the last 90 days.
These insiders have reportedly sold 0.05% of YELP's float during this time, contributing to a bearish insider sentiment score of 28.99 for the stock.
Wall Street's waning interest in Yelp's narrative has added to the company's challenges.
Institutional interest in the stock is weak, with the average portfolio allocation by fund managers down by 23% during the most recent quarter.
Although the total number of institutional owners on the register has grown by 0.5% to 577, additional share accumulation is just not happening. The fintel fund sentiment score of 25.91 includes all of these factors and more, ranking YELP stock in the bottom quintile out of 36,627 globally screened securities.
Baird equity research analyst colin sebastian highlighted to investors that this is not the first time YELP has been approached by activist investors. The analyst believes that the stock-based compensation is only partly to blame for the poor share price performance and thinks that shares will likely trade toward the firm's $40 target price for the stock.
Baird maintained its 'neutral' recommendation on the stock but thinks that it is in a better position now than it was in prior years thanks to investment in its platform with better engineering.
fintels consensus target price of $35.32 suggests analysts in the Street think YELP is almost fully valued around current levels with only 9% additional upside left for the 12 months ahead.
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