EOT Trade Alert – November 13, 2012

Corey Williams | November 13, 2012

November 13, 2012

Trade Alert:

Buy YELP February 2013 $20 Calls at $1.85 or better

Company Background:

Yelp (YELP) operates the online city guide yelp.com. It helps people find places to eat, shop, drink, relax, and play based on the informed opinions of a community of locals in the know. It offers information relating to restaurants, shopping, food, nightlife, arts and entertainment, local flavor, public services and government, active life, event planning and services, hotels and travel, beauty and spas, education, health and medical, local services, home services, religious organizations, professional services, mass media, automotive, pets, financial services, and real estate.

Short-Term Catalyst:

YELP tanked after the company reported 3rd quarter earnings a few weeks ago. The shares are down 45% from the 52-week high and 28% since they reported earnings.

But it wasn’t because YELP had a bad quarter. Far from it…

Last quarter, revenue at the online review company hit $36.4 million. It was a 63% year over year jump in revenue. And it was $6 million more than Yelp’s previous revenue guidance.

And those revenues trickled down to the fast growing company’s bottom line as well. Their net loss of 3 cents per share was a penny better than the 4 cent per share loss analysts were expecting.

The driving force behind the recent selloff was management’s guidance for 4th quarter revenue. They expect revenue between $40 million and $40.5 million this quarter. The forecast fell short of the $40.8 million analysts were expecting.

Here’s the thing…

YELP’s plan is working. More users are coming to the site and they’re evaluating businesses more often. Average monthly users grew 37% to around 84 million people and the number of reviews each month increased nearly 50%.

What’s more, they recently integrated their mobile app with Apple’s (AAPL) iPhone map application. It was used on more than 8 million unique devices a month. And that number is likely to soar as more iPhone users discover this new functionality.

More importantly, YELP hasn’t integrated advertising into their mobile app yet. But they will sometime this quarter. I’m expecting big things from their ability to monetize mobile when they report earnings in February.

And last but not least, take a look at YELP’s chart below. Since its IPO last March, YELP has swung between lows around $16 to highs around $28. After the recent pullback toward technical support, the odds are in favor of a run back toward the high end of this trading.

Let’s buy call options on YELP to grab some quick profits as it rebounds from oversold conditions.

Trade Details:

Underlying Stock Symbol:	YELP
Current Bid-Ask Price:	$1.55 – $1.70
Option “Buy Up To” Price:	$1.85
Break-Even On Stock At Expiration:	$21.85
Maximum Risk Per Contract:	$185

Exit Strategy:

YELP is trading at $17.21 per share. Resistance levels will be at $24.00 and again at $28.00. Remember, we want this stock to move higher. Support levels will be at $15.00 and $13.50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

Chart: