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Yelp Drops 30%, Zillow Falls 25%: Value Plays or Value Traps?

By Motley Fool Staff – Nov 15, 2018 at 11:25AM

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Both of these online operators are leaders in their segments, but that doesn't mean they have great business models.

Review website Yelp (YELP 1.90%) may be profitable, but it's not adding advertisers, and ads are where the money is -- which explains why it cut its guidance when it released its quarterly earnings last week. Meanwhile, real estate information platform Zillow (Z 3.44%) (ZG 3.32%) has deeper issues, as its perpetual attempts at transformation have failed to produce a single profitable year. And with the housing market slowing, its outlook is also looking shakier. Both got clobbered by the market, and when share prices sink, opportunists perk up.

In this segment from Motley Fool Money, host Chris Hill and senior analysts Jeff Fischer, David Kretzmann, and Jason Moser weigh the situations at the companies, and give their takes on the fundamental question for investors: Are these stocks bargains, or too risky to tangle with?

A full transcript follows the video.

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This video was recorded on Nov. 09, 2018.

Chris Hill: Shares of Yelp down 30% on Friday after a rough third quarter report. Yelp also cut revenue guidance for the full fiscal year. And Zillow shareholders had a week that was almost as bad. Zillow lost a quarter of its market cap after the online real estate platform's third quarter report included a similar cutting of guidance for the full fiscal year.

Let's start with Yelp, Jason. How bad is this?

Jason Moser: It's probably not as bad as the market is making it out to be. But a business built on selling ads based on its network effects, they need to be adding advertisers in order for the market to feel good about it. And unfortunately, they are not. What you have here is basically a resetting of expectations. I think the reaction, generally speaking, is the appropriate one. It may be a little overdone. Yelp is a profitable business. It does suffer, I think, from a little bit of an identity problem. Is it for restaurants? Is it for traveling? What is it really for? It's a little bit of all of that stuff. And there's some question as to the reliability of some of the reviews. But all of that considered, like I said, it is a profitable business, and things could be worse.

Hill: Speaking of which, how bad is Zillow?

Moser: I used to think this company had more potential than a slinky at the top of the stairs, Chris. I really did. I don't think that anymore. I've been bearish on this company for a while, internally, even here at the company. I think that anytime, as investors, when we hear the words "transformational innovation," we tend to get pretty excited. However, in this case, I think you need to be very, very concerned. That phrase was basically how they opened up the shareholder letter this quarter. The problem is that they've been basically innovating forever. They've been trying to do this ever since they've been public. They've not yet recorded a profitable year, and that's in the face of a really good housing market. Now, we're seeing the housing market starting to tighten up a little bit, and unfortunately, the go-to for this business, the premier agent side of it, is showing some signs of weakness. I'm not sold on the changes that they've made there. And then, the Zillow Offers side of the business that they're talking about growing out, totally not scalable, and I'm not sure it's going to be nearly as profitable as perhaps management wants it to be.

Hill: Is either one of these stocks of value play to you?

Moser: Personally, I would not invest in either one of them. I think they're probably more value traps. But, again, at least Yelp is profitable. They can point to something there. Zillow really has to get its act together.

Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.

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