Yelp (NYSE: YELP) has all the great signs of a massive loser, and many more. Feel free to take a break partway through if your eyes get tired. Here we go. Yelp has:
- Never posted positive net income.
- Lost more money in each successive year of reporting.
- Never posted positive free cash flow.
- High valuation by just about any metric.
- Operates in an industry with fierce competition.
- No sustainable competitive advantage.
Wow. If I read through lists like these every day, I'd be blind by now. That said, let's put it under a microscope while we still have our vision.
Zoom in on the awfulness
- No net income or FCF.
- It's expensive by just about any metric.
- Fierce competition.
Yelp took advantage of the recent Internet-IPO bubble we've seen in the last year-plus. But in fairness, it isn't the only guilty party. On top of Yelp, Facebook (Nasdaq: FB), Angie's List (Nasdaq: ANGI), Groupon (Nasdaq: GRPN), Zynga, Pandora, Zillow, and LinkedIn have all had IPOs in the past 15 months, and the majority of them far more recently than that. The Fool's own Alex Dumortier noted on the day Facebook went public how insanely overpriced it was, citing as one reason the "media/i-banking/technology love-fest."
He wasn't kidding. You know you're looking at some overvalued stocks when the one that looks like a value play is an online coupon company that's never made a profit:
| Company |
Ever Turned a Profit? |
Ever Had Positive FCF? |
P/B |
Industry P/B |
% Premium to Industry (P/B) |
|---|---|---|---|---|---|
| Yelp | No | No |
10.44 |
2.93 |
256% |
| Angie's List | No | No |
25.8 |
3.7 |
597% |
| Groupon | No | Yes |
6.71 |
2.93 |
129% |
Sources: Fool.com, Morningstar.
Of course, it's awful to rely on your largest competitor for substantially all of your business -- and if it's awful, you can be sure Yelp beat you to it. Yelp's entire business model consists of relying on Google (Nasdaq: GOOG) search results to deliver traffic to its pages; Google quickly noticed this opportunity, and rolled out an initiative called Google Places that offers the exact same service.
Yelp will not die alone
The other two companies from the table above, Angie's List and Groupon, also look pretty miserable. Though a direct competitor of Yelp's, Angie's business model is different; it actually charges for its services. This subscription-based business model has its purported advantage in the fact that review quality rises, and consumers who pay to be a part of it are usually ready to buy when they log in.
This may sound great, but a quick glance at the table above is all that's needed to bring us back to our senses.
What about Groupon? Could there be a silver lining to this dreadful e-picture? I'm afraid not. A horde of competitors have entered the e-coupon market, with sites like Google Offers, Daily Deals, and dozens of others popping up almost overnight to wet their beaks in the local coupon game. Groupon stock has lost nearly 70% of its value since its highest close around $26 in November.
But even alongside these other two doomed e-businesses, Yelp takes the cake for worst investment. Its laundry list of problems, qualitative and quantitative alike, are simply a recipe for financial disaster.
In the end, poor metrics and no barriers to entry make these three Internet companies long-term losers. With larger competitors lurking in every corner and a strong history of negative earnings, Yelp, Angie's List and Groupon are where investors send money to die, which is why I've made "underperform" CAPS calls on all three.
That's not to say that every tech IPO in the recent past has been a disaster. In fact, one of them looks like an awful good deal. Read about it today in this free report.
