Should You Buy Yelp Stock Ahead of Earnings?

Investors are emotional so more often than not, stock market prices overshoot in either direction. But somewhere the truth always lies in the middle. That is the case with Yelp (NYSE:YELP) stock.

Earlier this decade, Yelp stock came out of the gate strong and within 18 months it rose to $100 per share. Since then, it has given a lot of those gains up. Now the stock sells at $38, but that could all change this week.

Management reports earnings this week and those are usually triggers for big moves. The open interest in the options are pricing in a +/- $5.75 which is about 15%. It is important to remember that the short-term reactions to earnings are always a binary event. We don’t know what the report will look like nor do we know how traders will react to it.

The last two earnings reports caused massive moves in Yelp stock. Last August, Yelp stock spiked 30% on the headlines but unfortunately, in November, the opposite happened.

This time, YELP comes into the earnings event almost mid-range between $50 and $30 per share. It is encouraging that the stock is maintaining an ascending channel of higher lows and higher highs.

This is especially important because it includes the Christmas period where the equity markets had a big correction. Being able to hold above prior lows during such a difficult period suggests that the sellers could be exhausted, so the stock is basing.

This alone is not a reason to buy Yelp stock. Especially that it just rallied 30% in a short period of time. There is too much uncertainty for me to own it through this earnings season. I feel like I lack the edge over the short sellers.

It is a simple matter of allocating risk. Fundamentally, YELP sells at a trailing price-to-earnings ratio of 20. Although this sounds low, it’s not cheap. Considering that this is more expensive than Apple (NASDQ:AAPL), I can’t justify putting YELP stock in my portfolio. I’d rather own AAPL where I’d have more conviction. This is nothing against the company, but to me so there are better stocks to own than Yelp.

Bottom Line on Yelp Stock

Technically there are levels to trade here for the short term. YELP stock is about halfway filling the disaster earnings gap from November. Usually, markets like to fill the entire gaps but the bulls are slogging into resistance.

The $36.50 level was important for the bulls to beat. And for now, it has acted as support. So the bulls have a mini platform from which to mount another effort higher.

On Feb. 6, there was an effort to push Yelp stock to $39 per share, so that becomes my upside candle to watch. Momentum buyers would step in above that. Meanwhile, $36.50 to $37 should be interim support. These are low time-frame levels that won’t hold up through an important event like the earnings report this week, so they won’t serve as long-term entry points.

Below $35 per share would bring $30 back into the picture.

The upcoming uncertainty of the earnings report will likely cause a lot of conservative fans of YELP to sit the event out. Wannabe fans are probably even more hesitant. But for someone that believes in the company long term, they can pick up a few shares ahead of the earnings. This by no means is a statement of enthusiasm. My prognosis for the stock is guarded.

Nevertheless, the weekly chart shows higher lows since 2016. Slowly but surely, YELP stock is building a good ascending channel so it can definitely prove me wrong. I just choose to put my risk elsewhere at this time.

Click here for a bonus video that I recently shared discussing FireEye (NASDAQ:FEYE) that could help with the concepts discussed here.. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.