Why Yelp Inc Shares Are Screaming Higher Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Yelp Inc are trading roughly 13% higher today after news broke that Priceline.com would acquire  OpenTable for $2.6 billion.

So what: This news seems to have little bearing on Yelp itself at first glance. Shares of OpenTable have leapt nearly 50% from yesterday's close, but there has been no such buyout chatter swirling around Yelp recently. Even after the buyout, OpenTable is still valued at less than half Yelp's market cap, which would also indicate a smaller pool of potential buyers.


Now what: Yelp and OpenTable have complementary business models -- Yelp helps users find, assess, and rate local businesses, while OpenTable is focused on booking dining reservations for users -- but they are not so similar that an acquisition of one company should lead to a bidding frenzy for the other. Yelp has also been on a tear over the past year -- even with the buyout's near-50% pop in its favor, OpenTable is still a full 100% behind Yelp's 150% gain for the past 12 months. Yelp has also been growing faster on the top line, although it's never posted positive EPS, unlike OpenTable, which has been profitable for years.

Yelp was no bargain before this deal, and it looks even more overvalued now when you compare its valuation ratios  to OpenTable's:

Valuation Ratio

OpenTable

Yelp

Price to Sales

12.5

19.0

Forward Price to Earnings

75.0

8,945

Price to Free Cash Flow

51.2

843.5

Source: YCharts. All valuations current following acquisition news.

Does this look like a screaming buy? It sure doesn't to me. I'd keep my distance until Yelp comes back to earth.

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The article Why Yelp Inc Shares Are Screaming Higher Today originally appeared on Fool.com.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends OpenTable, Priceline Group, and Yelp. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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