Yelp Inc (NYSE:YELP) finds itself in an interesting position. With high revenue growth and predictions for sustained profitability, the company appears solid on the surface. However, Facebook Inc (NASDAQ:FB) and Google parent Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) have entered into direct competition with the social media review site. While all appears well with YELP stock, facing large, well-known competitors could pose an unbeatable challenge.
YELP Stock Triples Since 2016
Paypal Holdings Inc (NASDAQ:PYPL) employees Jeremy Stoppelman and Russell Simmons founded Yelp in 2004 after Stoppelman had trouble finding good online reviews for a local doctor. After some initial challenges, the founders raised capital, redesigned the website, and steadily grew its user base. During this time, social media was in its infancy. Over time, Yelp grew into the dominant social media site in the online review niche. Its name recognition became the company’s moat.
Threats to this moat have not yet appeared in the YELP stock price. The stock has more than tripled in value since early 2016. Its current PE ratio stands at over 200, metrics typically seen in the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX). Over the last five years, annual revenue growth has averaged over 50%. Analysts also forecast earnings will double in 2018, and rise at least 50% for the two years after.
YELP Stock Now Has Serious Competition
Unfortunately for Yelp, the social media landscape has changed since it was founded. Facebook has now become the dominant social media site. Search giant Google also serves as a source for online reviews. The size and name recognition of Facebook and Google are reducing Yelp’s moat. Facebook Local now directly competes with Yelp. Reviews tied to Google My Business also pose an alternative. Each company has a market value of over 100 times the size of YELP’s $3.9 billion market cap. This spells trouble for the online review giant. Both have the name recognition and financing to drive website views away from the company.
Investors Still Believe in YELP Stock
However, not all is lost with YELP. Given the forecasted revenue and profit growth, there’s been no signs of consumers abandoning the company. Moreover, ad revenue continues to increase.
The company has also made some interesting moves to drive profit. In early 2015, Yelp attempted to extend its reach by purchasing Eat24, an online food ordering service for $134 million. The company did not find success in online ordering and sold Eat24 to Grubhub Inc (NYSE:GRUB) for $287.5 million. The company also received a partnership out of the deal, receiving Yelp reviews as people utilized Grubhub delivery.
Yelp has made strategic attempts to expand its moat. Unfortunately, I don’t think it’s going to be enough to keep the company going as an independent entity or help YELP stock. The Yelp name still carries weight due to its previous dominance in the online review niche. However, it lacks the resources to compete with Google and Facebook. I think YELP stock ends its existence in a buyout. Buyers should not assume a buyout would benefit them. With a 200+ PE ratio, Yelp’s much larger rivals could wait for a lower stock price before attempting a takeover.
Bottom Line on YELP Stock
Unfortunately for YELP stock investors, the company has few options to answer the competitive threat posed by Facebook and Google. The company established its initial dominance in the online review niche before the social media industry took off. Its popularity continues. As a result, the company has reported strong revenue and earnings numbers, and the stock has been driven up to a high PE ratio as a result.
Although the stock has returned impressive growth, it lacks the resources to compete with two competitors who are each more than 100 times its size. A buyout is possible. However, more likely than not, the buyout would occur at a lower stock price than where the stock trades today. Given the high PE ratio and the rapidly shrinking moat, investors should limit their Yelp exposure to finding new restaurants.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.