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Earnings preview: Yelp bets on new advertising policy to drive Q4 growth

Yelp (YELP), the online review website that helps millions of customers make informed buying decisions, has been adopting more flexible advertising terms to strengthen its main revenue source. When the company unveils the fourth-quarter financial results Wednesday after the closing bell, it is expected to report earnings of $0.13 per share, which represents a marked improvement from the net loss recorded a year earlier.

Yelp Q3 earnings surge
Yelp Q3 2018 earnings infographic

Driving the turnaround, revenues are seen moving up 10.5% annually to $241.1 million. Due to the multiple revisions to the estimates in recent weeks and analysts’ mixed views on the company’s December-quarter performance, there is no clear trend with regard to the possible outcome. However, the positive performance in the recent quarters, when earnings mostly exceeded forecasts, adds to the probability of a beat.

Due to the multiple revisions to the estimates in recent weeks, there is no clear trend with regard to the possible outcome

Advertising, which constitutes the major chunk of revenues, witnessed double-digit growth consistently in the recent past. The biggest challenge facing Yelp is that when it comes to market share, it has to compete with search service giant Google (GOOG) that enjoys a solid presence in the review market, supported by the Instagram app.

The long-term trend is not very encouraging, and the softness has raised concerns among a section of investors. Last month, the management sought the intervention of financial advisory firm Evercore to defend an activist fund that recommended an overhaul of Yelp’s board of directors and a potential divestiture of the company, citing its lackluster performance.

Related: Yelp Inc. Q3 2018 Earnings Conference Call Transcript

For the September quarter, the San Francisco, California-based company had reported a 90% surge in earnings to $0.17 per share on revenues of $241 million, up 8%. While profit exceeded market estimates by a wide margin, revenues missed.

The general perception is that Yelp is currently undervalued, which brightens the prospects of the stock making meaningful gains in the near term. The consensus analysts’ rating on the stock is buy, followed by hold, with a mean price target of $39.88. Initiating its coverage on the stock, Goldman Sachs last week recommended a buy with a price target of $42.00.

Yelp shares have underperformed the market in recent years, losing about 10% in the last twelve months alone. The stock, however, made a positive start to 2019 and gained steadily since then. It closed the last trading session higher by about 5%.

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