When a growth stock stumbles, the reaction on Wall Street is usually brutal. Just look at Yelp Inc (YELP), which is a leading online reviews site. During past year, the shares have plunged from $51 to $21. Keep in mind that — back in March 2012 — the company came public at an offering price of $15.
Despite the much more attractive valuation, it’s still probably a good idea to avoid Yelp stock. After all, the growth rate is getting sluggish. Consider that Yelp believes that 2016 will see revenues of $685 million to $700 million. This would represent a 25% to 27% increase. But the prior year growth ramp was a much more impressive 46%.
Another knock for Yelp stock is the bottom line — or lack thereof. During the past four quarters, the company has posted net losses.
OK, so what might be going on here?
Stiff Competition for Yelp Stock
Well, the competitive environment is only getting more intense for Yelp. The fact is that the company must fight against a host of rivals like Angie’s List Inc (ANGI), Amazon.com, Inc. (AMZN), Priceline Group Inc’s (PCLN) OpenTable, Pro.com, Thumbtack, Kudzu and Urbanspoon.
But perhaps the biggest threat is Alphabet Inc (GOOG, GOOGL), as Yelp gets more than half of its web visits from the search engine. One problem is that Google has periodically changed its algorithms, which have negatively impacted traffic.
But Google has also been promoting its own online listings. According to the most recent Yelp 10-K: “The resulting promotion of Google’s own competing products in its web search results has negatively impacted the search ranking of our website.”
Oh, and then there is the mighty Facebook Inc (FB). The social network has been building its business pages, which count over 50 million listings. As should be no surprise, FB has been testing its own review system.
No doubt, Wall Street analysts are getting worried. UBS analyst Eric Sheridan, for example, called his latest research report on Yelp stock a “negative review.” He noted the competition, slowing revenues and traffic, rising costs of the salesforce and marketing and issues with the Eat24 food-ordering business.
Interestingly enough, Yelp has also been a magnet for plenty of drama. There was the situation when the company fired someone who publicly complained she needed to take unpaid leave to care for her boyfriend, who suffered from a brain ailment. Then there was another social media post from an employee who claimed she was underpaid. She was fired too.
Even the C-Suite has not been immune. After all, CFO Rob Krolik recently announced he is leaving the company. It was something that seemed to be unexpected since Yelp did not have a replacement.
Bottom Line on Yelp Stock
But hey, might Yelp still be buyout bait?
Perhaps so. But then again, building a reviews site is not particularly tough. The hard part is getting the scale. And for the most part, this is what Google, Microsoft Corporation (MSFT) and Facebook have already.
Granted, it’s also true that Yelp stock is much, much cheaper now. But on a relative basis, it still may not be cheap enough. Yelp stock trades 2.9 times revenues while the multiple for ANGI is 1.3X and Groupon Inc (GRPN) is at mere 1X.
In other words, there still could be more downside, especially as the competition continues to take its toll and the growth rate languishes.
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.
