Yelp: Hands-Down Leader

09/19/2013 8:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This company is quickly becoming the Yellow Pages of the Internet, both in the US and around the world, says Mike Cintolo of Cabot Market Letter.

Yelp (YELP) has become the go-to Web site (and mobile app) to use when looking for ideas on what to eat and, increasingly, what to do—its users, reviews, and traffic are soaring, and we like how every market it enters follows a (relatively) predictable expansion path.

Longer-term, the possibility of offering online ordering and reservations is big. The stock had a huge run after second quarter earnings, but as we wrote last week, that move came on the heels of a huge IPO base. Expect volatility.

Technically, to most observers, the stock is far too high to buy, but if the market can hold together, the odds are that the stock has much farther to run.

Of course, charts are just one tool to use; fundamentals count just as much, if not more, and that is what really has us excited about Yelp.

About 108 million visitors use Yelp every month, contributing to the 42.5 million reviews of tens of thousands of different restaurants and attractions.

It's the hands-down leader in the field (Google hasn't been able to get any traction with its reviews) and is expanding like mad, both in the US and overseas, which currently makes up just 5% of revenue but is bound to mushroom in the years ahead.

Overall revenue growth remains very strong and steady (between 63% and 69% for seven straight quarters) and cash flow is picking up in a hurry.

YELP probably needs a little more time to digest its huge six-week advance, but given the fundamentals and the chart, the odds are that the next big move is up.

We have decided to add the stock to our model portfolio. The stock is very strong, but also very volatile; expect ups and downs, but we think the potential is huge.

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