Yelp Inc.: First Profit Leads the Way for Profitable Options Trading

We continue another interesting week of trading stock options today as we explore options of Yelp Inc. (NYSE:YELP), a business with a market capitalization of $5.03B that connects customers with businesses in their immediate environment. Yelp connects people with great local businesses and its users have contributed approximately 36.0 million cumulative reviews of almost every type of local business, from restaurants, boutiques and salons to dentists, mechanics and plumbers.

A casual look at Yelp Inc. does not present the stock as a favorite options trading candidate considering the fact that the company battled with profitability after its IPO. In fact, Yelp became a turnaround story after posting impressive second quarter earnings in which it posted its first profit since IPO.

Earnings at a Glance

Yelp reported earnings of $0.04 per share to beat the consensus analysts’ estimate of a loss of $0.03 per share. The $0.04 earnings that was reported also marks a 500% improvement over the loss of $0.01 that was reported in the same period last year.

Yelp reported revenue of $88.8M to mark a 61% increment over the revenue of $34.6M that it delivered in Q2 2013. It might interest you to know that the reported revenue surpassed the consensus analysts’ estimate of $86.4M in revenue.

The best part of the second quarter earnings is the positive guidance that Yelp gave for the third quarter and FY 2014. Yelp expects its third quarter revenue to come in between $98M and $99M. The company also expects adjusted EBITDA to come in between $18M and $19M in the third quarter. For the full year, Yelp expects to record revenues between $372M and $375M and the company expects its full year EBITDA to come in between $67M and $69M.

Upside Potential Ahead

YELP chart

The stock chart above shows how shares of Yelp have traded within the last one year. Stocks of Yelp traded hands around $69 per share today to mark a 47.46% discount to its 52-week high of $101.75.  You can easily see the RSI of 50.83, which suggests that the buying action on the stock is just starting. I strongly believe that Yelp will ride the momentum of its first profitable quarter back to the 52-Week high.

Shares are Worth At Least $100 Per Share

In June, Priceline (PCLN) acquired OpenTable (OPEN), one of Yelp’s peers in the online business directory and review industry for $2.6B. The acquisition invariably means that OpenTable was bought at a 46% premium to its value at that time. The fact that Yelp has crossed over into profitability suggests that the company might soon become the target of an acquisition. By conservative estimates, if Yelp were purchased at a 40% premium to its current value, the shares would be acquired at about $106.6 apiece.

How to Trade YELP Options

I am optimistic about the upside potential that Yelp has and I strongly believe that the stock will touch its 52-week high within the next 6 months. I recommend the YELP Jan 2015 80.000 call (YELP150117C00080000) at an asking price of $5.80.

— Daily Option Alerts

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