Goldman Sachs says Yelp shares are worth buying, can rally more than 20%

Published Mon, Jul 17 20236:05 AM EDTUpdated Mon, Jul 17 202310:33 AM EDT

Goldman Sachs is optimistic on Yelp as investors weigh the outlook for the digital advertising industry in the second half of 2023. Analyst Eric Sheridan upgraded the stock to buy from neutral and raised his price target by $9 to $47. Sheridan's new target implies shares could rally 23.3% from Friday's close. The upgrade comes "on the back of stable/rising local advertising trends, an analysis of the incremental margin opportunity and the potential for stable/increased shareholder returns in the years ahead," Sheridan said in a note to clients Monday. Yelp rose 3.1% in Monday premarket trading. The stock has gained nearly 40% since 2023 began, with the bulk of the gain coming after it last reported earnings. YELP YTD mountain Yelp's 2023 Sheridan's $47 target for shares puts him ahead of peers on Wall Street, with the next most bullish analyst expecting the stock to reach a relatively modest $43, according to Refinitiv. Looking at the entire industry, Sheridan said digital ad trends should either be stable or slightly improve in the second quarter compared with the first. The companies should be helped by easier comparison periods; sustained strength in advertising from industries such as travel, local and omnichannel retail; and a small rebound in brand advertising across the board from the deep cuts in late 2022. Still, he said companies should continue to bring conservative commentary around future performance on earnings calls despite the solid backdrop in the first half of 2023. Yelp is one stock in the space with a risk/reward skew that has turned more positive, Sheridan said. A stable or even slightly improving local advertising environment, improvements to the ad technology stack and new initiatives are reasons Sheridan thinks the company can maintain revenue growth in the medium to high single-digit percent range between 2024 and 2027. The company should also see stable margin expansion over the next five years as revenue growth comes through high incremental margins, he said. Free cash flow could continue getting put to work on stock buybacks, with Yelp having the potential to purchase about 50% of its market cap over the next half decade. Despite the stock's rally, he said shares are still considered cheap when comparing price and earnings. — CNBC's Michael Bloom contributed to this report.