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Yelp Stock is Frothy, But Still a Big Buy

Just this week, MKM Partners put a “buy” recommendation on Yelp (YELP) stock — the restaurant and business review site — with a target of $71 a share. Thanks to a slight slide today, YELP is currently trading at just $52 or so, and that means these analysts are predicting over 35% upside for the stock.

YELP was upgraded from “neutral” to “overweight” at JP Morgan Chase (JPM) yesterday.

So should you risk an investment in Yelp stock despite the fact that it is still unprofitable? I say yes — because YELP and sites like it including Angie’s List (ANGI), OpenTable (OPEN) and TripAdvisor (TRIP) are going to be increasingly important to consumers in a digital age.

First, Yelp earnings: Once again the tech company surprised Wall Street with its Q2 numbers beating on both revenue and earnings. Yes, YELP stock was still operating in the red but the loss was just a penny vs. forecasts of a 4-cent loss, thanks in large part to big growth in mobile advertising.

With revenue growth of 69% year-over-year, this pairing was pretty impressive; YELP shares have gapped up about 28% in the last five days as a result.

Wall Street seems to believe in Yelp. Guidance remains conservative for the second half of the year, and that could result in another blowout report in a few months.

It’s also important to acknowledge that Yelp has a powerful brand at home but also growing influence abroad. Over 108 million unique visitors came to the site in the second quarter, and international traffic contributed about 16% of that volume. Cumulative reviews topped 42 million on the period.

There is a risk of buying a top here, of course, since things are frothy. And with Yelp stock not forecast to turn a profit until fiscal 2014 there is no guarantee that this company is going to be viable unless the momentum continues at the same clip.

And with about 20% of the float in Yelp stock held short as of July 15, it’s safe to say a short squeeze was behind some of that upside momentum in addition to bullish investors.

There’s also the risk of disruption, particularly from Google (GOOG) after its purchase of Zagat in 2011 to get into the reviews game … not to mention the chance of some other tech company simply finding a better way to connect customers with each other, since it’s not rocket science to provide a message board to users.

But in the big picture, I remain convinced that the world is becoming increasingly flat, and that online review sites and community forums are going to be an important way that consumers connect with businesses in a digital age.

YELP stock is uniquely positioned to benefit thanks to its scale and brand power.

All investors need to do is be patient and wait for the red ink to stop and the green to start flowing. If YELP stock soared this much on a narrow loss, just imagine the pop if it reports a surprise profit in Q3 numbers.

The consensus forecast is just for a mere 1-cent loss, so it’s a very real possibility.

Related Reading:

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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Mystic Maggie

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