Is Yelp a Good Buy?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Google (NASDAQ: GOOG) has recently acquired Frommer’s, a travel advisory service that publishes print guidebooks and offers Frommers.com to the masses. The move, expected to be worth $23 million, will increase the tech giant’s footprint in the travel and local search industry. With this latest purchase, Google is adding to an already formidable collection of leisure-related services, headlined by last year’s acquisitions of Zagat, a restaurant ratings company, and ITA Software, a widely used faring engine (here’s more details). While Internet users will likely see an even larger level of search engine functionality, many of Google’s competitors, including Yelp (NYSE: YELP), have to be feeling a bit blue.
Since its IPO in early March, shares of Yelp have lost nearly 3%, as concerns over the company’s shaky business model and expensive valuation have given investors reason to pause. Though it has been announced that Apple (NASDAQ: AAPL) will integrate Yelp into its new iOS6 Maps app (video here), Google’s venture into this arena will still have an impact on the company’s customer base. For example, the Yelp user who is distrusting of peer review may prefer a more professional take on the subject. Assuming that Google is able to integrate Zagat with the style of Frommer’s traditional guidebooks, users will eventually be able to access expert opinions on everything from hotels to fine dining through the search engine.
While this shift isn’t expected to occur overnight, it does represent a risk to all of the YELP bulls out there. Additionally, the company is still having trouble turning the corner to post-IPO profitability. In its second quarter earnings release, Yelp reported an earnings loss of -$0.03 a share, though this did beat the Street’s estimate of -$0.06. Riding better than expected mobile usage and advertising sales, the company also raised its year-end estimates, expecting to generate $135 million in revenue, up 62% from 2011.
From an earnings standpoint, analysts are still expecting the company to report a 2012 EPS of -$0.31, though it is predicted to break even by the end of 2013. In its Q2 results, it was reported that the company’s domain name receives around 80 million unique visitors per month, up 52% from last year. Interestingly, Yelp has not yet begun to monetize its mobile users, which is estimated to be responsible for 40% of its total traffic. If the company is able to become profitable going forward, mobile advertising will be crucial, though it ultimately faces the same difficulties as Facebook.
As mentioned above, there are obvious valuation concerns surrounding Yelp’s stock. At current prices, shares of YELP are trading at a Price-to-Sales ratio (14.9X) above the Internet content and information industry’s average (5.1X), and peers like Google (5.0X), Facebook (12.4X), and Yahoo (NASDAQ: YHOO) at 3.7X. The story is the same when looking at the company’s book value -- YELP trades at a Price-to-Book ratio (10.4X) far higher than the industry norm (3.4X) and the likes of GOOG (3.3X), FB (3.5X), and YHOO (1.4X). Using forward looking earnings metrics, we can see that Yelp is trading at a Forward P/E of 710.3X, far above GOOG (14.1X), YHOO (12.4X), and even FB (34.3X).
Though the potential for Yelp’s mobile monetization is there, it appears that the markets are placing too much importance on the company’s guidance readjustment and its iOS6 deal with Apple. Currently trading in the lower $20s, a price in the $14-$15 range looks like a much more attractive entry point. Intriguingly, there are rumors circulating that Yelp might be a desirable acquisition for Yahoo CEO Marissa Mayer, as she has recently sold half of her company’s stake in Alibaba. Ardent investors would be wise to continually monitor this situation.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Yahoo!. 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.
