A pair of Internet stocks are joining forces, as Yahoo (YHOO) just announced it has entered into a partnership with Yelp (YELP) to use its online reviews in search results. Wall Street has reacted positively, with YHOO stock enjoying gains of more than 1% on a flat day for the market, and YELP stock up more than 2% after spiking by 6%.
At least early on, the details of the arrangement are few and fuzzy, with missing items including financial terms and how it will be branded.
But it does look like we’ll start seeing Yelp reviews show up on Yahoo’s search platform within a few weeks.
The deal looks like a coup for YELP. It verifies at least in some way that the company’s reviews — which count more than 53 million — are valuable. That’s important considering the massive market potential for local commerce — there are roughly 73 million local businesses across the globe, and the local ad market was about $133 billion in 2012 (for both online and offline sources) and expected to grow to $152 billion by 2017.
Of course, it’s not that YELP necessarily needed the help — its growth has been red-hot. In the latest quarter, revenues soared by 72% to $70.7 million, which topped the Street consensus of $67.3 million. Meanwhile, the company’s monthly active users increased 39% on a year-over-year basis, up to 120 million.
The story is a little different at YHOO.
The company’s search business has been unimpressive — revenue growth was just 8% in the fourth quarter — and its partnership with Microsoft (MSFT) has seen little traction. (More unfortunate still, YHOO is stuck with this deal until 2015.) YHOO essentially has turned into a marginal player in the search business at just about 10% of the market.
So it’s actually smart for YHOO to explore add-on revenue opportunities, and YELP should provide a nice boost, especially on the mobile side. It’s not that YHOO has been struggling with boosting user growth, mind you, but monetization has been lacking.
This doesn’t “solve” Yahoo, obviously. The fact remains that the display business is remains under pressure as the company must battle rivals Google (GOOG) and Facebook (FB). Indeed, the pressure is decidedly down — in Q4, display revenue dropped by a grueling 6%.
Meanwhile, YHOO investors are left waiting. According to InvestorPlace.com’s Jonathan Berr:
“Mayer has been tasked with growing the business, and as seen on the revenue side, it’s just not happening yet. But much like every CEO who is in the midst of a turnaround, Mayer still is asking Wall Street to be patient — something that’s becoming increasingly limited in supply.”
For the foreseeable future, the key to YHOO stock won’t be display ads or a Yelp partnership, but the outcome of the Alibaba IPO and what comes of Yahoo’s 24% stake. And that’s a cloudy crystal ball — it’s still unclear when the deal will hit the market, and there are also signs that Alibaba’s growth might be slowing amid the Chinese economy’s issues.
Investors should be cautious with YELP stock, too, but not because of the company’s prospects — just its valuation. The forward price-to-earnings ratio on YELP stock is at whopping 255, which is leaps higher than other stocks such as Facebook (37) and Groupon (GRPN, 41).
YELP stock could be vulnerable to healthy profit-taking or pressure if the growth rate comes under expectations. But on the flip side, consider any meaningful correction in the stock as a signal to buy.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All 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.