Why Not to Buy Yelp Despite Good Q2 Results

By Ashish Sharma - August 7, 2012 | Tickers: GOOG, GRPN, LNKD, YELP, ZNGA | 0 Comments

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Yelp (NYSE: YELP) reported solid Q2 earnings ahead of the consensus revenues by ~ $2 million while the GAAP EPS of (0.03) beat the consensus estimates of (0.06). While the results were good, we are still skeptical about the ability of Yelp to compete in the highly fluid environment considering its dependence on Google (NASDAQ: GOOG). As the stock is approaching its lockup expiration date, we believe that the stock prices could fall with large blocks of shares coming into the market and hence we rate this as a sell.

Lockup Expiration threat:

Yelp, at the time of its IPO issued only 8.2 million shares or roughly 13% of the total shares outstanding. Yelp’s 180 day lockup period is scheduled to end on 29 August 2012. As the lockup expiration date of Yelp comes closer, we believe that the stock will be negatively affected by shareholder’s selling similar to its internet peers Groupon (NASDAQ: GRPN), Zynga (NASDAQ: ZNGA) and LinkedIn (NYSE: LNKD), all of which sunk on the expiration date. As this short term negative catalyst is bound to affect the stock going forward, we would like to add that it may be a good time to short the shares now and wait for a strong supply of shares in the market on the expiration date.

Competition from Google and Dependence on Google:

Although the threat from direct competitors such as Yahoo! Local, YP.com, CityGrid and Superpages are low as Yelp holds considerable advantage in terms of its product offering, we believe that on a macro level Yelp faces a huge threat from companies like Google and Groupon, when it comes to acquire Local-business-ad-dollars. Both Google and Groupon enjoy considerable high penetration in local advertising market when compared to Yelp. Google’s Local business reviews product, Google Places poses a significant risk to Yelp as its functionalities are added to the Google Maps product. As Google looks to become a one-stop-solution for mobile location-based-searches, we believe that android users are more likely to use Google places rather than Yelp to find businesses. Apart from that, Yelp’s dependence on Google for its traffic is another negative. Roughly 50% of Yelp’s traffic is driven by Google's unbranded searches (“shoes New York”) with an additional 25% coming from branded search (“shoes New York yelp”). Furthermore, the changes to Google's search algorithm have already seen Yelp results for the unbranded queries move further down the page as Google Places results acquire the top slots.

Source: Google.com and TheAnalystHub.com research

Mobile Monetization still a worry

Even after management indicated that they are seeing more monetization in the mobile searches, we are not fully convinced. The management said that mobile monetization is a high priority, but we still wanted to see something material done till now as 40% of the searches on Yelp come from mobile. We have already seen the doom mobile monetization has brought for companies like Facebook and Zynga as they face significant challenges in growing CTRs in comparison to the robust user growth; a discrepancy that Yelp is likely to face as well.

Furthermore, Yelp will likely face an investment ramp in 2012 as it is trying to enter into new international markets. As a new market usually takes two years to monetize according to the standards laid by Yelp, we believe that the expansion will result in additional pressures on the already negative GAAP EPS. As competitive pressures are likely to increase in the near term and a negative catalyst is in place in the form of lockup expiration, we believe that it is a good time to sell Yelp.

Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.

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