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Yelp Inc (YELP) Stock: Impressive Q3, But Its Absurd Valuation Is Deadly

Kudos for Yelp on a quality quarter, but the stock is still overvalued

Yelp Inc (YELP) stock deserves a round of applause — let’s begin with that. Few thought its third quarter would come out like it did — myself included.

Yelp Inc (YELP) Stock: Impressive Q3, But Its Absurd Valuation Is DeadlyShares of the consumer review website spiked, jumping as much as 8% in after-hours trading Wednesday after posting better-than-expected revenues. YELP stock soared as traders celebrated the quarter boosted by the popularity of its mobile app.

It was a welcome reversal for shareholders. At the close of the bell on Wednesday, YELP stock was down 59% in 2015, as decelerating user growth and a series of lousy quarters and lowered guidance hit the stock hard.

Wednesday’s report should reassure investors that the slowdown in Yelp’s business isn’t quite as bad as it seemed. That’s a net positive to be sure, but I still wouldn’t count on YELP as a pillar of your portfolio going forward.

Third-Quarter YELP Numbers

Revenue clocked in at $143.6 million in the third quarter, firmly above the $141.42 million called for by the Street, and up 40% year-over-year. Earnings per share missed, as YELP stock posted a loss of 11 cents vs. estimates for a loss of 9 cents. Yelp managed to break even on a non-GAAP basis, turning a profit of 3 cents per share.

Mobile numbers were solid, however, which was a big plus for Yelp stock since investors were understandably worried about those going into Wednesday’s earnings call.

On top of that, GrubHub (GRUB), an analog of Yelp’s Eat24 online food delivery platform, reported a miserable third quarter on Tuesday, sparking fears that Eat24’s results could drag down YELP stock as well.

And of course Twitter (TWTR) reported yet another quarter of emphatically terrible user growth, with monthly active users growing by just 1.2% quarter-over-quarter.

Not Yelp.

Mobile unique visitors grew by 22% year-over-year, halting a troubling multi-quarter pattern of decelerating mobile use. The growth rate had declined from 37% in Q4 to 29% in Q1 to 22% in Q2. To hold steady at 22% was a win. Quarter-over-quarter, mobile unique visitors advanced 7.2%, which was also good.

The company’s guidance for full-year revenue between $545.5 million and $551.5 million — easily making the midpoint above Wall Street’s $545.9 million estimate — the bulls had reason to get back into YELP stock.

The Problem

Fundamentally, the problem with YELP stock is that the online review industry has very, very low barriers to entry.

Alphabet (GOOG, GOOGL) does restaurant reviews quite well, as a matter of fact, and Facebook (FB) is threatening to entirely disrupt Yelp already without really even trying. I cringe at the thought of what it will be able to do with a little more time and effort.

Even if we forget YELP’s competition and look at it in a vacuum for the fun of it, the company still loses money. Furthermore, we can hardly be confident in extrapolating out one quarter (where the positive takeaway was that mobile merely wasn’t decelerating) and project that into the future. The long-term trend still looks like trouble.

But to be honest, YELP stock’s absurd valuation is the nail in the coffin.

Yelp’s gains have fluctuated wildly after earnings, dwindling from 8% to less than 2% and back to nearly 7% in Thursday’s morning trading. They will always fluctuate in the minutes after earnings, but I have a feeling some investors are just trying to take their money and run on any upside.

Why pay more than 200 times earnings for an online reviews company?

As of this writing, John Divine owned Oct. 30, 2015 $23.50 YELP put options. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/yelp-inc-yelp-stock-earnings/.

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