Where's the Bottom for Yelp?

 | Apr 08, 2014 | 10:30 AM EDT
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Did you know that Yelp (YELP) is only down 4% year-to-date? That's only slightly more than the Nasdaq. When put that way, it doesn't sound too bad.

Yelp is off 34% from its all-time highs, however, which it touched at the start of March. Thirty-four percent! In five weeks!

The obvious question: Where's the bottom?

It could be a lot lower.

Yelp is a great company, so don't confuse that with me talking about Yelp the stock.

As a stock, Yelp IPO'd in March 2012. For more than a year afterward, it under-performed the Nasdaq and, in fact, had negative returns for its investors. Starting last spring, though, the company was able to show some fabulous growth, and the stock took off.

At the highs in March, Yelp was up about 300% from its post-IPO pricing. With the recent swoon in the stock, it's down to almost 150% of gains.

That's still fantastic, but folks have been piling out of the exits over these past few weeks.

And even with the price correction down, the company's valuation is still high. The company still trades with a forward P/E of 183x and a trailing price-to-sales valuation of 20x. Its enterprise value to earnings before taxes, interest, depreciation and amortization (trailing) ratio is 4,740. That's right, almost 5,000. By contrast, AOL's (AOL) EV to EBITDA ratio is about 7.5x.

With all that said, it's interesting that as of midday on Monday, Yelp was only down 1.5% while AOL was down more than 5%. Part of the reason for that is because Yelp has dropped a lot more recently than AOL has -- 34% vs. 24%. I think traders believe that the bottom is near for Yelp and other similar momentum mobile/social names such as Pandora (P), which is down 29% in the last month.

The problem with Yelp, though, is that if the market continues to grind down, it has little real business with which to draw a line in the sand; it just has the hopes and dreams of future revenue growth from the new cohorts of cities where it continues to launch around the world.

So, while we are likely close to a short-term rally off the lows for Yelp and other beaten-up momentum names, I would be leery of assuming the bottom is now in.

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