Yelp Inc (YELP) Stock’s Success Brings a New Threat

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Congratulations to anyone who’s stuck with Yelp Inc (NYSE:YELP) since early October. That stock had fallen 23% between its peak on Oct. 5 and Tuesday’s close, and some shareholders were starting to sweat. On the heels of a surprisingly good third-quarter report, though, Yelp stock is up 11%, and has sent a clear message of viability.

Yelp Inc (YELP) Stock's Success Brings a New Threat

Yet, there’s something of a downside to posting a second — and bigger — quarterly profit in a row. That is, now that Yelp has proven there’s money to be made in the online-review business, copycats will start to come out of the woodwork.

The question, then, is who poses the biggest threat to Yelp stock?

Yelp Stock Earnings

For its recently completed Q3, the online business directory and review website earned an operating profit of 22 cents per share on sales of $186.2 million. The top line was 30% stronger than the year-ago figure, and the bottom line was a nice swing to a profit versus a profit of only three cents per share of Yelp stock for the third quarter of 2015. Analysts were only calling for revenue of $183 million, and were expecting a loss of three cents per share.

The real head turner, however, was the company’s GAAP profit. It actually had one. Though, it was only a real profit of two cents per share, it was the second consecutive GAAP profit (the first time that’s ever happened) for the young company — the culmination of years of sales growth and profit progress.

The company, however, still has a lot of work to do, and its stumbles are not quite over. What this proves is that Yelp is viable and only needs to remain on its current trajectory. That work, though, may become a great deal more difficult now that the cat’s out of the bag.

Here Come the Copycats

There was a time when being first meant you secured your spot as a market leader in whatever arena your business was in. Those days have passed. It would be naive for Yelp to think other players won’t step up their local business-marketing and online-rating games now that the forerunner in the business has proven it’s possible to make a buck.

Thing is, many of those would-be copycats are not only armed with better technological know-how, but also with deeper pockets and muscle to bully their way into the market. Don’t think for a minute it doesn’t happen all the time. Case in point? Amazon.com, Inc. (NASDAQ:AMZN).

AMZN didn’t invent the cloud computing and storage business. In fact, it didn’t even get into the business until after it was an established industry and the writing was on the wall, so to speak. Amazon Web Services has only been around since 2006. The industry as we know it today took a familiar form well before that, and was dominated by smaller fringe players rather than giant enterprises. Many of those players have been taken out of the game by Amazon.

It’s not Amazon that owners of Yelp stock need to worry about, however. And it’s not Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) — parent to Google — either. While both GOOGL and AMZN have deep pockets and have demonstrated a willingness to try new things, neither has demonstrated any clear understanding of the “social” aspect of social networking ideas that makes Yelp such a popular tool for consumers.

There’s little doubt as to who has figured out how to meld the internet and people’s feelings/social life though … Facebook Inc (NASDAQ:FB). FB not only has the financial wherewithal to beat Yelp at its own game, it’s also already a hub for consumers seeking opinions and recommendations on local businesses.

Facebook also has a Yelp-like tool in place. Last month, it unveiled a tweak that lets its members get recommendations from friends regarding local businesses, and then facilitates interactions between Facebook members and those businesses in question.

It may be a small piece of Facebook’s engagement strategy now, but Yelp stock holders know FB isn’t going to skip a now-viable and profitable opportunity.

Bottom Line for Yelp Stock

Kudos to Yelp for continuing to work the plan until it created a successful business. The years-long effort is now being vindicated. Indeed, the very business model is now clear. Trouble is, it’s just as clear for Facebook as much as it is for Yelp, and FB is on much firmer footing.

That’s not to say Yelp is doomed. It is to say, however, Yelp stock may not be able to meet the lofty expectations prompted by its recent fiscal success. Bigger and better players are now aiming for that same market.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/yelp-stock-amzn-googl-goog-fb-earnings/.

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