Help Yelp!

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

Post its earnings announcement on November 1, Yelp (NYSE: YELP) is down over 24% in a week, despite the fact that the online review site beat both revenues and earnings forecasts. Yelp turned a loss of $2 million or 3 cents/share down from a loss of 24 cents/share in the same quarter last year, and revenues of $36.4M that beat analyst forecasts by 6M.

Listening to Yelp's Q3 earnings call, one thing that disappointed me was its management's greater focus on revenues than earnings. While revenue growth is good, what ultimately matters more to shareholders is earnings. Revenues grew 63% year-over-year to $36.4 million. However, selling general and admin (SG&A) expenses were as high as $28.3 million, which primarily led the company to report net losses.

The company needs help. Not inside help. Outside help. I'm not proposing change of management. That won't help. I'm proposing an acquisition of Yelp. Here's why;

Qype Acquisition not Worth it!

Two weeks ago, Yelp purchased Qype, one of Europe's largest local review websites. Qype currently has about 2 million reviews on its website, has 15 million monthly visitors across 13 different countries. Yelp paid approximately $24.2 million of the total $50 million in cash and the rest in the form of 970,000 of its common stock. For the next quarter, the company expects that Qype will generate around $900,000 in revenues but $2 million in expenses. Again, the expenses are out-weighing revenues and will lead to overall losses for the company. Yelp estimates over $1 million in losses coming from Qype alone. The company doesn't see the acquisition turning around profits anytime soon. As the management puts it, the acquisition will pay off in the 'long term'. How long the term? You're free to make your own guesses. With that kind of uncertainty associated with the acquisition, troubles in Europe and a further drag on losses, I don't see how this is a good deal.

International Expansion: Asset or Liability?

Yelp, as of late, is active in 19 countries. Yelp has recently expanded to Asia, with its first entry point in Singapore. The idea behind Qype's acquisition was to expand to 13 new markets in Europe. However, CFO Robert Krolik informed investors in the latest earnings call that at least 43 of their international markets have not contributed at all to revenues this year. I believe the company should have concentrated more on its markets at home. Before expanding abroad, Yelp should have at least been making some bucks (earnings, not revenues) at home. From where I see this, going global didn't make sense at this juncture.

The Mobile-Monetization Problem

Yelp faces pretty much the same problem that Facebook does--inability to monetize mobile. According to Yelp, its mobile app was used on an average of 8 million mobile devices per month in the Q3 and approximately 45% of all Yelp searches were conducted through it. Bear in mind, the company hasn't fully incorporated local ads to its mobile apps yet. They expect to do so by the end of Q4. One thing that the management proudly boasts about, and that caused the company's stock price to jump in the recent months was its collaboration with Apple. However, bad reviews on Apple Maps on almost all tech review websites make me want to question whether Yelp would fare well with Apple. It's obvious, being integrated with Apple Maps alone won't help Yelp generate and maintain revenue growth and, most importantly, earnings growth for years to come--assuming the problems with Apple Maps are fixed.

Competition

Competition is tight for Yelp. As earlier mentioned, the Qype acquisition is not likely to help it much either. Qype, just like Yelp, also drives most of its traffic from Google. The company management sounds over-optimistic about their Qype acquisition, when at the same time they acknowledge the gigantic threat that Google poses to Yelp's very existence. Google's (NASDAQ: GOOG) acquisition of Frommer's this year, a travel guide brand, and Zagat last year, a restaurant-review site, strengthens Google's position in the online review industry. Google's strong-hold over searches is making Yelp's life a living hell. Yelp has sued Google last year on anti-trust grounds, for giving Yelp's competitors precedence over Yelp. Another party to the suit was review website TripAdvisor which is another of Yelp's competitors. It's no secret that despite their efforts, Google continues to win in this business segment.

Not just Google, Yelp also faces competition from other giants that are entering the online local business-reviews arena. Amazon's LivingSocial is one example. Facebook's check-ins, similar to FourSquare make me want to wonder if Facebook would also be further penetrating this market.

Credibility is another serious issue for Yelp to deal with. Compared to Google, Amazon, Facebook and even Expedia's spin-off TripAdvisor, Yelp is viewed as the least reliable review source. Its reviews are often questioned on the grounds that they are either fake or the company gives good reviews to businesses that pay it more in ad fees than those that pay less or nothing.

Fundamentals

One good thing about Yelp is its debt-free balance sheet. The company has zero long term debt and thus zero debt to equity. The company holds cash and equivalents of over $123 million. During Q3, approximately $700,000 was generated in cash from operations. With 31.83% of its float short, Yelp stock may see a short-term limited surge in buying activity when the shorts come in to cover their positions.

For the fourth quarter, management expects revenue growth of approx. 75%, giving it a range of $40 million to $40.5 million. For the full year, revenues are expected to be in the range of $136M to $137M or approximately 64% growth from last year. Average EPS for the full year is expected to be around - $0.31. Negative earnings make the price to earnings multiple meaningless. For comparison purposes, I'm using Price to Sales, Price to Book and Enterprise Value to Revenue ratios. Yelp's P/S of 9.6, P/B of 8.01 and EV/Rev of 8.59, against peer TripAdvisor's P/S of 6.62, P/B of 7.03 and EV/Rev of 6.44, all indicate that YELP is overpriced compared to its closest peer.

Go up for Adoption!

Anybody with a good idea of business can tell that its business model is weak. The company continues to spend millions on marketing itself. Who wants to pay for something when he can get it for free elsewhere? Yelp's management's hubris continues to kill the company. The online business-reviews site refused Google's half a million acquisition offer three years ago. If Yelp doesn't give itself up for adoption (read, acquisition) now, the company will soon go down the same path that Groupon went.

 

 


PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and TripAdvisor. Motley Fool newsletter services recommend Google and TripAdvisor. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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