How Low Can Yelp Go?

Shares of Yelp (NYSE: YELP  ) hit a 52-week low yesterday. Let's look at how it got here and whether dark clouds are ahead.

How it got here
Yelp hasn't been around long. The company went public just three months ago, with the offer pricing at $15. Shares soared as high as $26 on that first day, representing a gain of as much as 73%, and subsequently traded as high as $31.96 over the following month.

The company posted its first public earnings release, and it wasn't pretty with shares shedding 11% of their value the next day. Revenue jumped by 66% to $27.4 million, although its net loss exploded by more than threefold to $9.8 million in red ink, largely due to big increases in sales and marketing expenses accompanied by a similarly big jump in stock-based compensation.

Full-year revenue is expected to be $128 million to $132 million, which will hopefully turn into adjusted EBITDA of breakeven to slightly positive.

Yelp relies heavily on search engines for traffic, with Google (Nasdaq: GOOG  ) in particular playing a large role in bringing users to the site, while Yahoo! (Nasdaq: YHOO  ) and Microsoft (Nasdaq: MSFT  ) Bing contribute to a lesser extent. The tough part for Yelp is that search engines continue to develop their own competing services, and Google removed links to Yelp on portions of its search results in favor of its own local ad results.

How it stacks up
Let's see how Yelp stacks up with some of its peers that also serve up user reviews, including the major search engines that Yelp lists as its competitors.

YELP Chart

YELP data by YCharts

We'll add in some more fundamental metrics for deeper insight.

Company

Price/Sales (TTM)

Price/Book (MRQ)

Sales Growth (MRQ)

Net Margin (TTM)

Yelp 10.2 6.8 66.0% (24.2%)
Angie's List (Nasdaq: ANGI  ) 7.0 21.6 76.4% (51.1%)
Google 4.7 3.0 24.1% 27.1%
Yahoo! 3.6 1.4 0.6% 11.2%
Microsoft 3.3 3.5 6.0% 32.0%

Source: Reuters. TTM = trailing 12 months. MRQ = most recent quarter.

Neither Yelp nor Angie's List is profitable, despite their strong top-line growth. Yelp has been around for eight years and Angie's List has been around for 17. Competing with juggernauts Google and Microsoft Bing in the local ad space is going to be tough.

What's next?
I think the odds are stacked heavily against the smaller players here. If Angie's List still hasn't figured out how to turn a profit after nearly two decades, I don't think Yelp has a lot to look forward to.

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Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Microsoft. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 05, 2012, at 7:13 PM, g2929 wrote:

    Whether Yelp makes money is not the point. They will continue to grow worldwide and the following will happen.

    Some company with total incompetent executives will have a half brain idea of buying Yelp for billions and Yelp will be sold.

    The reviewers will disappear, just like everyone ran away from myspace, they will run away from Yelp.

    The advertisers will run away as well and all that will remain is stagnant user reviews that are not being updated.

    As an ex-yelper myself, I have to say that the user reviews are the core of the business model. Whether the reviews are useful (funny or cool) or not, it is the mere fact that the reviews help bring some credibility to the establishment.

    As a business owner, I know for a fact that my business listing on yelp has been supressed from google seach indexing because I refused to pay for Yelp advertizement. My reward for doing so, was blackout, that means, no one can come to my yelp listing from google. I think it is fair since it is Yelp content and I don't really care about Yelp traffic.

    Yelp has become a verb and that means it is here to stay. They can only make money if they figure out a way to make the user pay for something. That was good enough a hint.

    other than that, I would not invest in the company as their advertisement model is flawed. Small businesses that need the exposure can get a one time exposure with Yelp but they don't benefit much from continuous relationship with Yelp.

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