A Cry for Yelp: A Brief Look Before Earnings
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) prices took off following its acquisition of European competitor Qype. This, in addition to the announcement that Yelp will post higher revenues than analyst estimates, provided a positive catalyst, although I should note Yelp is still unprofitable. As time marches toward earnings, Yelp shares are showing a positive trend. Here is a brief look at what can you expect from the earnings report.
Yelp Would Add More Cohorts That Will Not Generate Enough Revenue
In 2004, Yelp started its business from San Francisco, a city with an English speaking population and a healthy affinity for the internet. Over the course of time, it expanded to many more native English cities and some international English cities. Everything was boding well for Yelp. They made lots of money from advertising dollars provided by huge restaurants. But then they hit a rock. There weren’t enough good cities left. While Yelp has still continued adding new cohorts, it has not been able to derive much from these markets considering the bad internet availability and the native languages. In other words, Yelp’s growth has stopped and revenue per market has flattened in the range of $1.5 million per market. Because of these issues, I believe Yelp needs to show some extra muscle with the added new cohorts to justify its valuation.
Why No Money from Smartphone?
While many investors will be focused on any discussion of Smartphone monetization, I believe that most of them will be disappointed yet again. The reason is due to the business model that Yelp operates. Yelp currently derives a major part of its revenues through advertising. And No, the businesses don’t pay them for the listings. They pay them to be displayed more prominently on the website. Now, with the small screens mobiles have (Keeping aside the Galaxy Note), it actually becomes difficult even to see the search results, I wonder how Yelp will ever be able to promote the restaurants.
Yelp Has Dirty Data?
Speaking of the mobile issue, Yelp had seen an upside earlier with the integration in Apple’s (NASDAQ: AAPL) iOS6, but with the new Apple maps being branded a flop, it raises questions as to whether the prices for Yelp should adjust accordingly. As there is news that a possible reason of the Map failure could have been Yelp’s inaccurate and flawed information being used in iO6 location based services, it still remains unclear whether Yelp will be featured in the next update for iOS. And if not, will the advertisers still be willing to spend their big ad dollars on Yelp.
Why Does Google Enter in Every Business Now?
Now that we have defined that Yelp is in the advertising business, let’s take a look at its competitor, Google (NASDAQ: GOOG). Google actually affects Yelp in every manner possible. And Google is advancing aggressively in the review space. Apart from acquiring Zagat to augment its Google Places Platform, Google has also acquired Frommer for the travel review space. Further, Google is responsible for about 75% of Yelp’s site- 50% indirect searches (“San Francisco restaurants”) and 25% direct searches (“San Francisco restaurants Yelp”). With the kind of money and the close control Google has over Yelp, I believe that Yelp’s life will be more difficult going ahead as it looks for expansion in the new markets.
The Bottom Line
Yelp looks into an abyss of non-performance. It has been unprofitable for the last 4 quarters and still will be so according to the recent management announcements. While Yelp has been expanding rather aggressively, the new markets will take long time to gain traction. Further, the reliance of Yelp on its main competitor Google doesn’t help and hence I rate it as a sell.
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