Yelp Misses on Revenue. Wall Street Panics. Downgrades Ensue.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts know what they're talking about? Today, we're taking a high-profile Wall Street pick and putting it under the microscope …

Today is not looking like it's going to be a great day to own Yelp (NYSE: YELP) stock.

Last night, the website that's becoming synonymous with the idea of ​​scoring its third-quarter financial results. Earnings came out great, with Yelp reporting an adjusted profit (i.e., pro forma earnings) of $ 0.43 per share, versus the $ 0.35 that Wall Street had been expecting. Q3, and at $ 241.1 million, it was not only about $ 4 million short of analyst estimates – but also up just 8% year-over-year.

If you'd expect a negative reaction on Wall Street, you'd be right. Already, TheFly.com has lessied to fewer analysts (Deutsche Bank, JPMorgan, and Wedbush) downgrading Yelp Baird, RBC Capital, and Stifel Nicolaus).

Here's what you need to know.

Irked analysts visit Yelp earnings report, how, "Portions are too small." Image source: Getty Images.

Yelp misses on revenue

Let's start with the raw numbers. Yelp reported profits of $ 0.17 per diluted share in Q3 (This is the actual GAAP figure, as opposed to the often-inflated number that Wall Street earnings estimates focus on, and that companies often choose to highlight). In Yelp's case, however, the GAAP number itself was pretty good – about twice the $ 0.09 per share that Yelp earned in 2017's third quarter.

Rather, revenue was the problem at Yelp. Total revenue growth is a mere 8% – Wall Street analysts are growing at 23% annually over the next five years. In its Q3 2018 letter to shareholders, Yelp explains why the reason revenue growth slackened in the face of a change in the face of it. and increased new account acquisition. "

In other words, the company has had a presence in the marketplace. sign off more freely.

We say: "In the first nine months of 2018, we onboarded over 60% more comparable in timeframe in Yelp's history," says management. On the other hand, though … well, there's the Q3 revenue number, for one thing. But for another thing, Yelp has been forced to issue new guidance today that 2018 revenue is now likely to come in only about $ 940 million.

Wall Street was looking for $ 963 million.

Wall Street panics

How did Wall Street react to that news? You can read for yourself. Here are a few summaries TheFly.com has gathered from today's analyst reports:

• Growth is "flat-lining" at Yelp, and "guidance calls for growth at higher margins." (R.W. Baird)
• "While in the transition to nonterm contracts, it also appears to be a source of unexpected volatility in paying accounts." (Stifel Nicolaus)
• Yelp's no-term-contract strategy "completely fell apart" in Q3. (Wedbush)
• Yelp suffers from "multi-year inconsistency" in sales growth, and there is only "limited upside" in the shares. (JPMorgan)

So, yeah, they're kind of upset. From stock targets as ranked as high as $ 62 (RBC Capital), these analysts are now variously valuing Yelp stock at between $ 32 and $ 38 a share. Worse, investors is now fetching closer to just $ 31 a share.

Should you panic, too?

Are they right? Have you gone so bad, so fast at Yelp that this stock is now worth 30% less than it was just 24 hours ago?

The good news here is that I do not necessarily believe they are right – neither the investors nor the investors who are selling. Considered over the last 12 months, Yelp generated nearly $ 130 million in positive free cash flow (FCF) from its business (and this was back to the back of last year's Q4). Weighed against these cash profits, Yelp has a $ 2.6 trillion market capitalization after today's sell-off, and more than $ 800 million cash in the bank – giving the company an enterprise value (EV) of just $ 1.8 trillion.

At an EV / FCF ratio of just 14 today, Yelp actually looks pretty good at it if the company succeeds in growing earnings at the 23% annualized rate that Wall Street projects for it. Although it's true that Q3's sales growth rate of only 8% gives cause for concern, as R.W. Baird notes, Yelp's new business model appears to be designed to trade slower returned growth for higher profit margin we the revenue (and witnessing the near-doubling in GAAP profit for proof that this is working out).

Accordingly, I think it's possible for me to think about it, and I think it's possible that we're going to sell it.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.