Local Service Provider Continues to Struggle

Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yelp (NYSE: YELP) recently disclosed the financial information for its fourth quarter in 2012, and the company's outlook does not seem bright. The online review business exhibited stronger financial performance when compared to the same quarter last year; however, the company is still far from reaching break even, as the losses continued in the fourth quarter. Yelp announced a loss of $5.6 million for the fourth quarter, which was lower than the loss of $9.1 million in the same quarter last year. However, when the financial information of the whole year is taken into consideration, Yelp lost more in 2012 when compared to 2011. For 2012 the loss was $19.1 million, which was higher than last year’s loss of $16.9 million.

Yelp exhibited a significant rise in revenue in the fourth quarter, increasing by 65% to $41.2 million from $24.9 million in the same quarter last year. The revenue of the company also grew in terms of the annual financial information. For 2012 revenue was $137.6 million, which is significantly higher than the revenue of $83.3 million in 2011. According to the CEO of Yelp, Jeremy Stoppelman, 2012 has been a “tremendous year for Yelp;” however, the analysts and the investors may find it hard to agree with the company’s CEO. The market performance of the company has been excessively volatile recently, and this market behavior can be directly attributed to the company’s weak financial performance. The following chart represents the financial performance of Yelp over the past few quarters.

It can be observed from the chart that the growth in the company’s revenue has followed a very stable and predictable pattern; however, the profit margin of the company has been volatile. Although the financial performance of the company in Q4 2012 is significantly better than Q4 2011 in terms of both revenue and profit margin, the decline in profit margin when compared to Q3 raises questions regarding the prospective growth in the profit margin of the company.

Yelp’s financial performance is also weak in comparison with its competitors. One of the major competitors of the company is Yahoo! (NASDAQ: YHOO), which operates a similar service called Yahoo! Local. Since Yahoo! holds a diversified business portfolio, its financial performance is significantly stronger than that of Yelp. Yahoo! holds an EPS of 3.28 against Yelp’s EPS of -0.35. Although Yelp’s service has more features as compared to Yahoo!, the strong position held by Yahoo! helps it attract a large number of visitors and therefore generate higher profits. Indicative of this, the net profit margin of Yahoo! for Q4 of 2012 was 9.27%. With new CEO Marissa Mayer, Yahoo! is undergoing some structural changes, and these changes have had a very positive impact on its market performance. The improving position of Yahoo! has made it difficult for Yelp to compete.

Another competitor of Yelp is Dex One Corporation (NYSE: DEXO). The services of Dex and Yelp directly overlap when it comes to introducing local business to consumers. The only point of difference is that the reviews at Dex are not provided by users. The revenue of Dex is generated from marketing services it provides to local businesses. Since Dex is a significantly smaller setup, its financial position is smaller. However, Dex holds an EPS of 2.05, which is significantly higher when compared to Yelp. Dex is a smaller company in terms of market capital. The market capital of Dex stands at 89.56 million, which is significantly lower than Yelp’s 1.36 billion. Therefore, it can be said that Yelp does not stand strong against its competition with regard to its financial performance.

Yelp also depends upon the search results of Google for the majority of its visitors. Most of the users visit Yelp through Google. Therefore, this overdependence on Google is one of the largest business risks Yelp faces. If Google modifies its search indices and causes the elimination of Yelp’s links, Yelp's business will be excessively affected.

Yelp’s Market Performance

Yelp’s market performance has been highly volatile in the recent past. Currently, the shares of the company are trading within a range of $21.05 and $22.22. The 52 week range of the share price of Yelp has been between $14.10 and $31.96. From the significant difference between the two extremes, it can be inferred that the market performance of the company has remained highly unpredictable over the past months. The current share price is significantly lower than the 52 week high, and considering the weak financial performance of the company, it cannot be said with a reasonable level of certainty if the company will reach its 52 week high again in the foreseeable future. The following chart represents the trend of share price of Yelp over the past year.

It can be clearly observed from the chart that the share price of Yelp has reached several highs and lows since it was launched on the market. The inclines and declines have been exceptionally steep, therefore rendering the stock a highly risky avenue for investment.

After analysis of multiple relevant factors, in my opinion, investors should hold the investment in Yelp. The rationalization behind this recommendation is that the market performance of the company is highly volatile, and therefore buying the shares in the company may be an unfavorable decision.


muhammadbazil has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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