Yelp Inc (YELP) might be your go-to app for finding a new restaurant to try Friday night, but YELP stock shouldn’t be a go-to when it comes to finding a new investment.
Shares of YELP stock, as you’ve likely read before, have been dramatically battered in recent months. While the stock was worth more than $100 around two years ago, shares are now sitting at just $18 even after a significant rebound of late. That $18 mark is worryingly near the company’s IPO price of $15 and represents a nearly 40% decline in just the first six weeks of the year.
The company’s most recent earnings report, released last week, resulted in more damage for already-struggling Yelp stock.
Earnings Aren’t Helping Yelp Stock
Yelp posted its fourth straight quarter of losses, which then added up to an operating loss nearly as wide as last year’s profit, and the worst since Yelp stock went public. Yelp also missed on EBITDA by $3.5 billion, and investors fled by double digits in the immediate aftermath.
Revenue growth in the most recent quarter was strong, as it has been, while the sales outlook was in line with the consensus and showed growth is still on the horizon when it comes to revenues. In the fourth quarter of 2015, sales grew by 40%, while the total expansion for the year was 46%.
Still, that annual growth rate is slated to be nearly cut in half next year. Net revenue is expected to be in the range of $685 million to $700 million, which would be a difference of 26% year-over-year.
That’s nothing to sneeze at, but it’s not a good sign when perhaps the only promising metric for a company is moving in the wrong direction — especially considering that the company’s cost of revenue has been increasing dramatically since Yelp hit the public market.
In 2012, the company’s revenue costs totaled $9.9 million. By 2014, that number had nearly quadrupled to 24.4 million. Last year, it more than doubled to over $50 million. No wonder Yelp is having such a hard time turning a profit.
While they’re narrowing, losses are still expected for the next two years. Analysts estimate that Yelp will go from a 44-cent loss last year to a 25-cent loss this year and a 6-cent loss in 2016. While that is improvement over time, realize that both results were expected to be in the black just a few months ago — so Wall Street is clearly souring on Yelp’s prospects.
Because of a lack of earnings, we can’t use the price-to-earnings ratio to find a fair value for YELP stock. But other ratios will suffice and show that, despite the bloodbath, Yelp hardly looks cheap. The stock is still trading for over 2 times sales and nearly 2 times book value.
And that’s just the fundamental piece of the story. Consider these other bearish factors:
- There is strong opposition to Yelp, as showcased recently in a documentary called Billion Dollar Bully.
- Yelp is supposedly suffering from the tech talent war taking place in the Valley.
- And short interest makes up more than 20% of the float, which shows just how negative the sentiment is.
All in all, there’s little to like about YELP stock, whether it’s the business narrative or the stock narrative. When a stock is this beaten-down, still looks overvalued and is about to suffer a slowdown with regards to its silver-lining metrics … well it’s best to stand clear.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
