If you happen to own Yelp Inc (YELP) stock, you might want to review the reasons you originally bought into the online consumer review website.
Because there’s a good chance its quarterly results will not be pretty.
YELP stock enjoyed a bit of a respite from its year-long decline on Monday, after Cantor Fitzgerald reiterated its “buy” rating on shares and maintained its $50 price target. The firm expects local ad revenue to drive results.
I do not share the expectation, and for one simple reason.
Trends Are Powerful
2015 hasn’t been kind to YELP stock holders, with shares down more than 55% to date. Although it’s primarily a consumer reviews site, some restaurants on Yelp also let users order pickup or delivery.
YELP built out that function of its website, aimed at competing with GrubHub (GRUB), by purchasing Eat24, an online food-ordering platform, for $134 million in cash and stock back in February.
GrubHub shares haven’t been performing too well either this year, down more than 11% as of Monday and dropping a further 25%-plus after a profits miss today. If GrubHub hasn’t posted mind-numbing numbers this year, it’s unlikely Eat24 will, either.
But there’s a far more dangerous pattern that’s manifested itself in YELP stock this year. The pattern is simply this: YELP earnings always seem to disappoint in one way or another:
- Friday, Feb. 6: YELP stock craters, losing more than 20% and hitting an all-time low after the company reported that unique visitors decreased 3% in the fourth quarter of 2014 from the quarter before. Yelp also announced a costly marketing campaign and was slammed by analyst downgrades.
- Thursday, April 29: YELP stock plunges, losing 19% by the ring of the opening bell, after missing on both Q1 2015 EPS and revenue. To make matters worse, it lowered its Q2 revenue guidance.
- Wednesday, July 29: YELP suffers another horrendous day-after earnings hangover, as shares fall 25.6% on ho-hum quarterly results and downright horrendous third-quarter and full-year guidance.
Now, I ask you to fill in the blank space:
- Thursday, Oct. 29:
I can’t fill in that space; no one who isn’t an insider can. But I can say that there’s far more reason to think YELP stock will disappoint us once more than blow us away.
Yelp’s Rapidly Decelerating User Growth
I also think that we’re bound to see monthly mobile unique visitors (let’s call them MMUVs), continue to decelerate in Wednesday afternoon’s report.
MMUV growth is an important traffic metric for YELP since it’s often touted as a pure-play mobile company, yet the trend is clear and troubling.
In Q2 2015, MMUVs grew 22% year-over-year. The previous quarter, they grew at a 29% clip. The period before that? MMUVs were up 37% in Q4 of last year.
Could MMUVs grow by 25% in the third-quarter? Sure, but 18% looks far more likely.
Could YELP stock soar as it roars past the 9-cents-per-share loss and $141.42 million in revenue Wall Street expects? Certainly, but if you’re betting on that to happen, you’re betting based on hope, not any sort of discernible pattern or logic.
Bottom Line
At the end of the day, the short-term signs aren’t pointing in Yelp’s favor.
However, the long-term signs don’t bode well either. YELP stock trades at about 280 times forward earnings, an incredible and altogether unjustified premium to the market (the S&P 500 goes for about 18.5x forward earnings).
On top of that, competition hasn’t even begun to seriously materialize. Facebook (FB) has only soft-launched some of the features, like restaurant reviews and its “Place Tips” function, that could decimate Yelp when rolled out fully.
Stay out of YELP stock before its third-quarter earnings report. Even if the company doesn’t seriously disappoint for that quarter, its long-term performance, I’m convinced, will be horrendous.
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.
