A year ago August, Yelp Inc. (NYSE: YELP) had its six-month unlock date. This was the time when insiders had the legal ability to sell their shares.
But a funny thing happened… The insiders didn’t sell — they bought.
The shorts got squeezed, and the shares pushed 30% higher into September.
Now, I’ve studied IPO unlocks for years. Shares rarely fall after the unlock date. They usually hit a bottom about a month before the unlock, and go up after the unlock.
This is just a variation on the “buy the rumor, sell the news” phenomenon we often see in the markets.
The great irony, of course, is that the unlock rules were created to protect the small investor. But in reality, the little guy ends up knowing just enough information to burn him…
After he shorts the stock, it goes up. Now he faces the hard choice of unlimited loses later, or a limited loss now. He chooses the former and buys back his short shares at a higher price. This pushes the shares up. The smart money sees this and buys — which pushes the stock up more, more shorts cover, etc.
This is the classic example of a short squeeze.
Here we are a year later, and Yelp has been running.
In fact, it has tripled this year, as you can see on this handy chart:
Yelp, as you are aware, is an Internet advertising company.
It posts reviews of small companies written by customers and gives these companies ratings. It also sells access to these reviews… If you pay them around $600 a month, you can get rid of bad reviews and ensure your company’s name rises to the top of the search results for your given sector.
Yelp claims that its algorithm cuts the obvious good reviews that are plants from the owners, as well as the obvious bad news.
Unsurprisingly, there are many small businesses that don’t want to pay for this “advertising,” and at least one has successfully sued Yelp.
BusinessWeek reported that one lawyer publicized a court transcript in which the judge called Yelp “the modern-day version of the mafia.”
Yelp, of course, is now countersuing.
It could be that Yelp will win, but when your business model depends on credibility and good relationships with your consumer, and you have neither… well, that’s not a company I want to own.
Furthermore, the chart looks like a blow-off top caused by a buy rating from Deutsche Bank. The analyst claimed Yelp could have $1 billion in revenue within five years (at which point it would still be overvalued at four times sales)…
The MACD is bearish, and it looks like it will come back and fill that gap in the mid $40s.
Yelp is Expensive
Yelp is in nosebleed territory as far as valuation is concerned. The company now sports a market cap of $4 billion and an estimated forward P/E of 260 on revenues of just $178 million.
I would tell you its trailing earnings numbers, but alas, like Amazon (NASDAQ: AMZN), it has none.
The company has only $96 million in cash, which seems light coming off a recent IPO. And given they have no earnings, it could lead to a secondary offering, which would dilute shares and cause Yelp to lose value.
On the plus side, the company has zero debt and is expanding into emerging markets.
Insider Dumping
But none of these is the reason Yelp’s share price is going to drop…
No. It’s because insiders are selling en mass.
Over the last few months, 64 insider transactions have sold 5.4 million shares out of 7.2 million insider shares held. Institutions now own 121% of the float. That will go down soon.
If you own Yelp, it’s time to take profits.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
