Should You Buy Yelp Stock? 3 Pros, 3 Cons (YELP)

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On the heels of its fourth-quarter report, last week, Yelp Inc (NYSE:YELP) got crushed, with the stock falling nearly 22% last Friday. Consider that shares of YELP stock have lost almost half their value in the past year.

YelpDespite all this, the Q4 report was still encouraging. Revenues spiked 56% to $109.9 million and net income came to 24 cents per share. The Street was looking for $108.4 million in revenues and profits of 7 cents per share.

The outlook for YELP was also fine. The company put out a forecast for Q1 revenues at a range of $114 million to $116, with adjusted EBITDA of $19 million to $21 million. For the most part, this was in line with analysts’ expectations.

So why did YELP stock get dumped? Well, investors got spooked by some of the worrisome trends with the growth rates in users. Wall Street seems to think that Yelp’s growth problems are going to continue in the long term.

So what’s an investor to do with YELP stock? Let’s take a look at the pros and cons to see if it’s worth buying after the recent pullback.

Yelp Stock Pros

Powerful network: For the last decade, YELP has built a thriving, loyal community. As a sign of this, the cumulative reviews jumped 35% to 71 million during the past 12 months. And the community is certainly valuable to advertisers. Nearly 90% of YELP users make a purchase within one week of using the app. Oh, and the typical local business increases revenues by a juicy $23,000 per year.

Mobile: One of the most convenient uses for smartphones is finding local businesses, and YELP has made great strides with its mobile efforts. For example, there are about 72 million monthly mobile visitors. In fact, about 45% of new reviews come from smartphones and 65% of searches are from mobile sources.

Market Opportunity: There is a major shift in ad dollars from traditional sources — like the Yellow Pages — to online platforms and mobile devices. By 2017, YELP believes that 30% of the of the $152 billion of local spending will go digital. But so far, YELP has only scratched the surface of the opportunity. After all, the company is still primarily U.S.-focused, with foreign markets representing roughly 3% of total revenues. But, as should be no surprise, the company is now making aggressive moves outside the U.S., as seen with the recent acquisitions of European operators Restaurant-Kritik and Cityvox.

On the other hand…

Yelp Stock Cons

Growth: Many of Yelp’s metrics are decelerating quarter-over-quarter. Consider the 2% drop in mobile unique users, or the 3% drop in total monthly unique visitors. Now it’s true that Q4 is generally slow because of seasonal factors. At the same time, YELP is likely getting close to saturation in the U.S. market, making the moves into foreign markets critical for Yelp stock. To boost those efforts, the company plans to triple its marketing expenditures for 2015 to $30 million and increase its salesforce by 40%. While such moves are a good idea, there is always the risk that the payoff could prove illusory.

Competition: YELP has to deal with some tough rivals, including operators like Kudzu, Angie’s List Inc (NASDAQ:ANGI), Urbanspoon, Foursquare and OpenTable, which is now owned by Priceline Group Inc (NASDAQ:PCLN). But the mega Internet companies like Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG, NASDAQ: GOOGL) could pose the biggest threat. They already have extensive ad systems, salesforces and massive user bases.

Risks of Mobile: Again, mobile will represent the main source of growth for Yelp. Yet there are some nagging issues. For example, Yelp has generally relied on search engine optimization, which has resulted in lots of free traffic. But that strategy isn’t as effective on mobile platforms. Instead, YELP has little choice but to spend more money on advertising, which isn’t cheap. Of course, the company has to buy ads from rivals like Facebook and Google.

Yelp Stock Verdict

Yelp has certainly built a great asset, with a strong community, innovative features and a well-known brand. The company has also made strong inroads with its mobile efforts. No doubt, YELP is in a great position to benefit from the secular shift in ad revenues to digital sources.

True, the company has hit a rough patch, as seen with the deceleration in user growth. But YELP is taking the right moves to get things back on track, such as boosting the salesforce and advertising expenditures.

But more importantly, the long-term potential is still bright. After all, YELP remains in the early stages of international expansion.

So is now a good time to buy Yelp stock? I think so. If you want a way to play mobile, this looks like a good bet.

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.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/yelp-stock-pros-cons/.

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