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Yelp Can Be Hazardous to Your Wealth

By Rick Munarriz - Sep 24, 2015 at 11:53AM

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The reviews website operator keeps getting panned itself.

Source: Yelp.  

It isn't easy being an investor in Yelp (YELP 3.77%) these days. Shares of the former dot-com darling behind the leading local venues reviews website have shed 58% of their value in 2015 through yesterday's close. It also apparently isn't financially rewarding to be a reviewer on the site itself sometimes. 

A judge has ruled that a Staten Island woman must pay a floor refinisher $1,000 for badmouthing the service provider on Yelp. She'll appeal and she might prevail. History has been kind to the Yelp reviewers that come under litigious attack after speaking their minds on the site. However, the judge here ruled that using words like "scam" and "liars" and accusing a service provider of robbing its customers is too inflammatory to let go. 

You can be sure that Yelp hopes that the woman comes out on top. Yelp would be losing a lot more than $1,000 if its users became hesitant, if not fearful, of speaking their minds as they populate the site with content. That would be the equivalent of the kids that Tom Sawyer duped into whitewashing his fence putting down their brushes in fear of retribution. 

This is just the latest in the many setbacks that have pummeled Yelp this year. It's hard to believe that this was the same stock that peaked in the triple digits 18 months ago, only to lose more than three quarters of its value. Wall Street loved Yelp at the time. It clearly doesn't feel that way now.

Adding insult to legal injury, Northland Capital became the latest Wall Street pro to lower its price target on Yelp. It's tweaking its price goal from $21.50 to $17.50, and if the news sounds familiar it's because Northland has been tracking the stock lower for months.

  • Northland downgraded the stock to the equivalent of a sell rating in April, slashing its price target from $49 to $35. It was the right call in retrospect, but things didn't end there.
  • It lowered its price target from $35 to $29.50 on July 13, two weeks ahead of posting its second-quarter results. 
  • Several analysts soured on Yelp on July 29, a day after posting brutal quarterly results and hosing down its guidance. Northland was one of them, taking down its price target from $29.50 to $21.50. 

In short, this is the fourth time in the past five months that Northland has had to adjust its price target in light of the plummeting share price. 

Things are pretty grim at Yelp. It kicked off the year with back-to-back quarterly deficits, stunning analysts that were holding out for small profits. The pessimism is thick now. Wall Street's now bracing for two more quarterly deficits to close out this forgettable year. 

Next year's profit forecast that stood at $0.48 a share just before Yelp delivered its rough second-quarter report has now been reduced to a handful of pennies. The business may be sound on the surface. There are 40% more merchants paying to advertise on Yelp than there were a year earlier, and the number of reviews on the site has grown 35% to 83 million in that time.

However, as Yelp deals with tight margins and the monetization challenge of the migration from PC to mobile usage -- as well as the notoriety fueled by angry nonadvertisers that feel the site treats them unfairly -- it's the reviews website operator itself that's getting panned these days. 

If the downticks continue we may eventually approach Yelp's IPO price of $15. If investors could review the site as an investment, it's pretty safe to say that the chatter would be more salty than sweet. 

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