With a Lawsuit No Longer in the Way, YELP Stock Doesn’t Look Half Bad

Like it or not, the online-review website has a viable business model

By James Brumley, InvestorPlace Feature Writer

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Good news for owners of Yelp (YELP) this week: The lawsuit being levied against it by some disgruntled shareholders has been tossed out by the court system for a second (and likely last) time.

With a Lawsuit No Longer in the Way, YELP Stock Doesn't Look Half BadYELP stock didn’t move much on the news, as the entire market was more than a little lethargic on the first day back from a long trading break.

Still, at the very least it’s a moral and psychological victory for the company, and comes at a time when there’s a light starting to shine at the end of the tunnel.

Could it be that YELP stock is finally buy-worthy now that a distracting — and annoying — lawsuit is in the rear-view mirror?

Lawsuit Tossed

In all fairness, nobody (including the hopeful plaintiffs) can say they didn’t get a fair chance in a courtroom.

The matter was initially raised early this year, when a class action shareholder suit said investors were damaged because not all of the reviews posted at the site were authentic. Not surprisingly, the suit mentioned the fact that some insiders sold YELP stock at prices well above the market price for the stock at the time the lawsuit was filed.

It’s not a stretch to say investors were simply ticked off by an investment that had soured.

That’s the way U.S. District Judge Jon Tigar saw it in April anyway, dismissing the suit on the grounds that any reasonable person — be it consumers or investors — would understand that not every single review posted at a crowd-sourced review site would be legitimate.

He subsequently tossed that effort to sue Yelp, noting the plaintiffs hadn’t even come close to proving Yelp had employed a “pay to play” strategy that would effectively extort ad revenue from businesses being reviewed at the website.

The plaintiffs never went away, though. They just regrouped, and this time tried a slightly different legal strategy. Once again, however, Jon Tigar wasn’t impressed, dismissing the revamped version of the suit as well. And again, he invoked a “let’s apply a little common sense” stance with his explanation.

The message being sent was loud and clear: A poorly performing stock doesn’t inherently indicate fraud.

The funny thing is, buried in the shadow of pending and potential lawsuits, Yelp is still growing quite well, and still teetering on the verge of reliable profitability.

Have You Looked at Yelp Lately?

You know those companies that grow the top line, but book correspondingly bigger and bigger losses along the way? Yelp isn’t one of them. It’s growing the top line quite firmly, and though the online-review company is learning as it goes, it’s tough to say the business model isn’t working. Just a little more scale up could make YELP viable once and for all.

A picture really is worth a thousand words, particularly when it’s a graphical representation of a company’s past six quarters, and an outlook for the coming four quarters.

In that light, Yelp’s recent results and estimates tell a visual story that’s easy to love.

Yelp Quarterly Results

The longer-term history and outlook paint an even more compelling picture.

Yelp Annual Results

Not everyone thinks Yelp is in a position to swing to a profit in 2017 and widen margins to 6% in 2018. But, getting to that proverbial promised land only requires that Yelp remain on its current trajectory.

Bottom Line for YELP Stock

None of this is to say Yelp has an easy path to profits. It doesn’t, and YELP stock will see plenty of ebb and flow between now and then.

But the overhang of the legal headache is now largely gone, and with that dust clearing, investors can finally start to appreciate the fact that Yelp is clearly doing something right. The market will continue to realize this as the company turns its potential into actual progress, buoying the stock.

You could certainly do a lot worse.

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/2015/12/yelp-stock-lawsuit/.

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