Reaching the Tipping Point Yet Again?
Rahul 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) shares riled up on the Lockup Expiration date contrary to the investor’s expectations of Yelp following the trend set by Facebook (NASDAQ: FB) and Groupon. The upside was basically inspired by the “insiders discipline” as insiders held on to their shares, giving the short sellers a run for their money. While some investors think that the insiders didn’t trade the stocks as they saw value in the company, we must remind them that Yelp's IPO had been 1/100th of that of Facebook. With such high size implications, Facebook would not have been able to match Yelp’s short interest. While the insiders showed improved discipline, we believe that this must not be taken as a sole criterion to buy the stock and feel that Yelp could see a tipping point soon as the investors realize that actually nothing has changed fundamentally.
While Yelp’s integration in Apple (NASDAQ: AAPL) iOS 6 will help Yelp to extend its reach and hence its value to the advertisers, we are still not clear about how Yelp plans to monetize this user base. We have already seen Facebook with its huge user base suffering due to poor mobile monetization in the past and we believe that Yelp could see similar headwinds in the future.
Furthermore, there is also an increasing risk that Yelp might need to pay Traffic acquisition costs to Apple and Google (NASDAQ: GOOG) in the future. Apple and Google provide significant value proposition to small companies such as Yelp while Apple and Google themselves don’t generate any value from them currently. While yelp does not pay for any traffic till now as indicated by the management in the Q2 call, we believe that it might likely change as Google tries to leverage Zagat at the expense of Yelp. As Yelp drives ~27% of its traffic from Google right now, we believe that a change in strategy from Google may result in huge TACs for Yelp.
We are also concerned about the scalability of the business model for Yelp. While cohorts like San Francisco, LA and NY with their high-population density, and a high level of technological sophistication fit particularly well with Yelp's offering, we are somewhat sceptical that some of the newer cities may not share the same characteristics with the original cohorts. We believe that Yelp faces a risk as new cities may not drive similarly impressive traction or revenue potential as the original cohorts.
Further, the deteriorating macro outlook may cause small businesses to rethink their marketing budgets in the weak demand environment. With small local businesses viewing online marketing as experimental, we believe that Yelp could see slowdown in new customer revenue growth. There is also the risk of advertisers not pushing their money into Yelp’s ad platform as most of the services are free. If an advertiser has good reviews, he may not bother as it is getting good reputation free of cost while if the advertiser gets bad reviews, he must not need to highlight its presence on Yelp.
As Yelp shares have soared ~17% since the lockup expiry date, we believe that there is a possibility of a headwind as insiders eventually start short selling. As Yelp still faces considerable risks, we are afraid about the unsustainability in the business model. With Google posing significant disintermediation risks, we believe that Yelp is up for a correction as the investors start looking at the fundamentals and therefore we rate it as a sell.
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