Yelp’s Underperforming Stock May Jump By 10%

Yelp Inc. (YELP) is due to report results on November 7 at the end of the trading session. Shares of the business review and social networking website may be due to jump by around 10% following those results, based on some bullish options bets and the technical charts. This may come as welcomed news to shareholders. The stock is down about 1% in 2019, despite the S&P 500 gain of more than 21%.

Analysts are not looking for a strong quarter, with earnings estimated to be flat versus last year at $0.50 per share. Meanwhile, revenue is forecast to have risen by as much as 9% to $262.11 million in the third quarter.

Betting Shares Rise

On October 29 the open interest for the November 15 $37 calls rose by over 4,800 contracts to a total open interest level of about 5,500. The calls trade for roughly $1.35 per contract, and for a buyer of those calls to earn a profit the stock would need to rise to a price of around $38.35 by the expiration date, a gain of about 10.2% from the current price of around $34.75 on October 29.

Volatility Ahead

The options market is implying a large move for the stock. The long straddle options strategy suggests the stock may rise or fall by as much as 13.25% by the expiration date on November 15 from the $35 strike price. It places the stock in a wide trading range of $30.35 to $39.65.  

Technical Downtrend

The stock has been trending lower as part of 2 steep downtrends since November 2018. The chart shows that the first downtrend has been broken and retested at the beginning of October around a price of $31.90. Now the stock is likely to work its way higher towards the second downtrend that is around a price of $36.75, and if it rises above that downtrend, it is likely to climb to approximately $38.20, a gain of about 9.9%.

Additionally, the chart shows that the stock has found a strong level of technical support around $31.90. However, should that level of support break, the equity could drop to around $29.50 a decline of about 15%.

A History Of Topping Expectations

Yelp has a very strong history of beating estimates. Over the past eight quarters the company has beaten analysts’ earnings estimates seven times, and by a wide amount. Additionally, it has also beaten revenue expectations in six of the past eight quarters. It means that the guidance will determine whether the stock rises or falls following the earnings release. The company has guided full-year 2019 revenue growth to 8 to 10%. Currently, analysts are forecasting revenue growth of 8.44%, which is at the low end of the company’s guidance.

Should Yelp deliver better than expected results as in the past and can provide improved guidance for its final quarter of the year, then perhaps the options bets and technical chart can prove to be correct.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.