Should I Buy Yelp Stock? 3 Pros, 3 Cons

The stock is certainly at lofty levels

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Should I Buy Yelp Stock? 3 Pros, 3 Cons

Cons for YELP

Valuation: YELP stock trades at lofty levels, trading at a forward price-to-earnings ratio of 255X. (Keep in mind that prior to the YELP earnings report, YTD 2013 returns sat at a whopping 265%.)

The result is that YELP’s multiple is an outlier when compared to its peers. For example, OpenTable’s (OPEN) forward PE is 33X and Angie’s List’s (ANGI) is at 90X.

Competition: Yelp faces many tough rivals. Just some include Kudzu, Angie’s List, Urbanspoon, Foodspotting, Foursquare and OpenTable.

But perhaps YELP’s biggest threat is Google (GOOG), which continues to invest heavily in the local e-commerce space. The company also has huge advantages with its Android platform and  hugely popular map app.

Yelp also gets over half of its web traffic from searches on Google. And this can certainly be dicey. As indicated in Yelp’s 10-Q:

“Google has removed links to our website from portions of its web search product and has promoted its own competing products, including Google’s local products, in its search results. Given the large volume of traffic to our website and the importance of the placement and display of results of a user’s search, similar actions in the future could have a substantial negative effect on our business and results of operations.”

Validity of reviews: Can Yelp’s reviews be trusted?  This has always been a nagging question. Although, so far, it seems that users are willing to rely on them for making decisions.

But there have been some recent issues. For example, New York fined 19 businesses for fake reviews. Interestingly enough, Yelp has a filter that generally tags a quarter of the overall reviews as not authentic. But according to a study from the Harvard Business School, the system may actually be missing many more.

Verdict for YELP

In only nine years, YELP has built a strong brand in the local space. But the company has also invested in its sales infrastructure and product development. The result is that YELP has continued to be a top-notch player in the market and has been able to deal with tough rivals.

Despite all this, Wall Street has already factored in the much of the expectations for growth, as seen with its nosebleed multiple.  In other words, if the competitive environment gets worse and Yelp’s growth path decelerates, YELP stock price could be vulnerable.

Given this, the cons outweigh the pros on the stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/10/buy-shares-yelp-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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