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Is Yelp Stock a Buy?

By Pearl Wang - May 1, 2020 at 8:00AM

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With shares that have drastically lagged the market and a potential boost to revenue in the second half of the year, is Yelp worth a look?

Shares of Yelp (YELP 1.72%) are down 36% this year, versus the S&P 500's 10% decrease. The company has been hurt by a worse-than-expected fourth-quarter earnings report, worries about advertising revenue, and slower consumer spending. However, the stock has seen an uptick lately, helped by news of stores and restaurants reopening shortly.

As some states in the U.S. tentatively begin to reopen businesses, could it be a good time to consider buying Yelp in anticipation of spending and advertising levels improving in the second half of 2020?

Yelp logo and illustration of products.

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Yelp has had a tough few months

Yelp's last earnings report for the fourth quarter came in below consensus expectations. Later, on March 19, the company announced the withdrawal of its first-quarter and full-year 2020 outlook due to uncertainty related to the coronavirus. Yelp has high exposure to smaller local businesses, which have seen decreases in revenue due to forced closures. These Yelp customers likely slashed advertising budgets, and Yelp receives about 96% of its revenue from advertising. On April 9, Yelp announced that consumer interest in its top categories dropped sharply from March 10: Restaurants dropped 64%, nightlife dropped 81%, gyms dropped 73%, and salons and other beauty businesses fell 83%. 

The company encountered additional problems when it created coronavirus relief fundraisers for businesses across the country  without their permission. Yelp intended the campaigns for businesses in dining, nightlife, beauty, fitness, and active life with fewer than five locations. Some of these entrepreneurs were angered by the surprise GoFundMe campaigns because they were not informed by Yelp beforehand; many learned about them from clients and demanded to opt out. Yelp paused the program, but it's already created animosity.

Yelp is in a tough position because much of its advertising revenue comes from restaurants and service-based businesses, including gyms and salons. Restaurants accounted for 14% of its ad revenue and were the largest category for received reviews at 48% of the total. The beauty and fitness category accounted for 12% of the company's total ad dollars in the same period.

While many restaurants have turned to takeout and delivery amid the forced closures and stay-at-home orders, this is not always making up for lost revenue. Salons and gyms have also closed across many states in the U.S. to help stop the spread of COVID-19.

Advertising revenue may take a while to return to pre-shutdown levels

While the U.S. is working on reopening the economy, timelines will vary by state. And fully resuming normal operations could take a while. Consumers might be cautious about being in close quarters at restaurants or gyms, especially in areas with high infection numbers like New York City. More likely, people will be cautious and reengage slowly. There's still no vaccine or easy treatment for COVID-19. Given this current state, neither consumers nor businesses will likely return to pre-coronavirus levels quickly.

Yelp is taking measures to preserve cash during this uncertain time. On April 9, the company announced that it would lay off 1,000 employees and furlough 1,100 more. It would also reduce hours for some employees. Executives at the company would be subject to pay cuts of 20% to 30%.

While Yelp will likely survive the recession, there's uncertainty around its revenue over the next few quarters. Many businesses are likely to scale back on marketing spending even after the economy reopens to make up for lost revenue during the period of partial and full closures. Many large public companies have announced efforts to reduce expenses and shore up cash reserves. This means fewer advertising dollars potentially spent with Yelp. And given that the majority of the consumer discretionary company's revenue comes from advertising, there's likely more volatility ahead for Yelp's shares.

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.

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