Of course Yelp Inc (NYSE:YELP) is exploring a sale. It’s a horribly overvalued business with no long-term growth prospects.
According to the Wall Street Journal
, the online consumer review website is trying to find a suitor, and the news immediately sent YELP stock nearly 20% higher Thursday.
I don’t blame Yelp for trying to find a buyer. Lord knows a YELP buyout is in the best interest of its shareholders. After all, if you were a Dutch tulip magnate in 1637, you’d be wise to ring up the Medicis and sell them on the prospect of diversifying their portfolio.
But this is the smart money we’re talking about. Nobody in corporate America is dumb enough to buy Yelp.
Bravo on the Timing
Yelp sees the writing on the wall, and knows it desperately needs to do something to fire up its business.
The only problem is, everyone else sees this too.
Let’s not forget that it was only last week when YELP stock plunged 18% after a horrendous first-quarter earnings report. Yelp missed on earnings and revenue, and also provided Q2 guidance that failed to meet expectations.
This was last week.
What’s even worse is that YELP still was grossly overvalued after the selloff, and now trades at a more ridiculous premium after the WSJ report. Currently, YELP stock trades at about 350 times this year’s expected earnings. If Yelp wants a buyout premium of, say, 20% of current levels, it would be trading at 400 times earnings.
But wait. We still haven’t covered the full absurdity of the situation.
It’s not just the valuation of YELP stock that makes Yelp so unattractive. It’s the underlying health (or lack thereof) of its long-term business! As InvestorPlace Editor Jeff Reeves noted Tuesday, YELP stock is losing the war with Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) for local ad dollars:
“Local restaurants and repair shops don’t have infinite ad budgets, so YELP stock is focused on a core customer with a low ceiling.
Similarly, those local businesses have a host of other outlets to advertise on — like online advertising heavyweights Google and Facebook, both of which allow for very sophisticated targeting.”
Easily outgunned by the data hordes of GOOG and FB, Yelp has further tainted its attraction as a buyout target by purchasing other companies at ridiculous valuations. In the first quarter it bought Eat24, a mobile food delivery platform, for $134 million. In return, Eat24 generated $5 million in revenue for YELP stock last quarter.
With Eat24’s closest competitor, GrubHub Inc (NYSE:GRUB), falling 10% after issuing bleak guidance of its own last week, that line of business isn’t looking too promising either.
Finally, you’ve got a general realization by the stock market at large that some of these high-flying Internet stocks — read: LinkedIn Corp (NYSE:LNKD) and Twitter Inc (NYSE:TWTR) — can’t quite live up to their valuations.
So yeah, YELP’s “exploring a sale.”
You know, like they’re searching for Jimmy Hoffa.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
