2015 has been a brutal year for business review site Yelp (NYSE:YELP) and daily deals site Groupon (NASDAQ:GRPN). Yelp stock has been cut in half since the beginning of the year, and Groupon stock has plunged nearly 70%. But as bulls flee both hated stocks, contrarian investors are probably wondering if either beaten-down stock is worth a closer look. Let's take a look at the headwinds Yelp and Groupon face, and which one has a better chance of bouncing back.
What happened to Yelp?
At first glance, Yelp's growth numbers look decent. Last quarter, its unique mobile visitors rose 21% annually to 89.2 million, and cumulative reviews climbed 35% to 89.6 million. Unique desktop visitors dipped 2% to 78.9 million, thanks to rising usage of its mobile site and app. Revenue rose 40% annually, but that represented a slowdown from 51% growth in the second quarter and 55% growth in the first. Local advertising revenue, which accounted for about 80% of Yelp's top line, rose 36%.
During the first nine months of 2015, Yelp's revenues rose 48% to $396 million. But during that period, total costs and expenses soared 55% to $410.9 million. As a result, Yelp posted a net loss of $10.7 million, down from a net profit of $3.7 million in the same period last year. During last quarter's conference call, CFO Rob Krolik attributed those expenses to an aggressive advertising campaign and "higher-than-expected" growth in its sales headcount, partially due to its acquisition of food delivery service Eat24 in February. Krolik said these investments would benefit Yelp over the long term, though, and didn't indicate that the company would cut costs in the near future.
Meanwhile, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and Facebook (NASDAQ: FB) are both aggressively expanding into the local reviews market. Google has integrated features like "Local Guides" into Google Maps to eliminate the friction between searching for a location and reading reviews. Facebook expanded its location-based services by merging check-ins with business pages and reviews. Yelp has a first-mover's advantage against both rivals, but it likely needs to spend more money on sales and marketing to maintain that lead. If those expenses keep rising as revenue growth slows down, Yelp's losses could widen.
What happened to Groupon?
Facebook and Google are expanding into Yelp's local reviews space, but both companies have retreated from Groupon's "daily deals" market. Four years ago, Facebook shuttered its daily deals site. Last year, Google killed its Groupon rival, Google Offers. Amazon (NASDAQ:AMZN) also recently announced that it will close its daily deals site, Amazon Local, in December. Groupon's main rival, LivingSocial, which Amazon owns a 30% stake in, recently laid off 20% of its staff.
These tech giants aren't retreating because Groupon is an unbeatable market leader. They're retreating because the daily deals model, once hailed as the "next big thing" in e-commerce, is arguably broken.
To attract customers on Groupon, businesses must offer steep discounts. Groupon typically keeps a 50% cut of each sale as a marketing fee, which means that many businesses take a loss on the sale. Business usually use that "loss-leader" strategy to generate additional purchases or attract return customers, but many Groupon customers are only interested in claiming the next daily deal.
Groupon's customer growth and spending have also been sluggish -- active customers only grew 4% annually last quarter, down from 6% growth in the second quarter. Trailing-12-month billings per active customer came in at just $132, down from $137 a year earlier. Gross billings fell 2% due to the impact of the strong dollar.
Even after claiming half of each sale, Groupon still isn't profitable. Last quarter, it posted a net loss of $27.6 million, compared to a loss of $21.2 million a year earlier. To reduce those losses, Groupon started automating business applications to rely less on human employees, announced 1,100 layoffs in September, and shuttered several overseas operations. Those moves will reduce its expenses, but they'll also shrink its global footprint and possibly cause overall bookings to decline.
Better buy now: Yelp
Yelp's expenses will likely continue outpacing its revenue growth, but its future looks brighter than Groupon's. Yelp is attracting competition from Google and Facebook because its business review model is built for growth. Meanwhile, these companies have stopped competing against Groupon because it's too tough to profit from daily deals. Groupon's P/S ratio of 0.5 makes it fundamentally cheaper than Yelp, which trades at 4 times sales, but Yelp still looks like a better contrarian buy at current prices.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon.com, and Facebook. The Motley Fool recommends Yelp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.