Oh my. Yelp Inc (NASDAQ:YELP). What are we going to do with it? Like so many other unicorns, we have a multi-billion dollar business that makes no money, and yet the stock just keeps going up. There’s no telling when Yelp stock will crater, but it will happen, and you just don’t want to be holding it when it does.
Look, in order for a company’s business model to be able to last, it must do one thing: solve a problem. Online reviews are a great idea, and having a go-to and reliable central website for reviews on just about everything is a fine idea.
But if Yelp vanished, would the world come to an end? No. Think about that. Would some terrible problem still exist if Yelp ceased to exist? No. Therein lies its problem. We got by before Yelp, so that means Yelp stock is not going to be a long-term winner.
Yelp had a first mover advantage in being a reviewing aggregator. Yet there’s a difference between Yelp and, say, the famous Zagat guide. Zagat was a trusted name in restaurant reviews that people were willing to pay for. Yelp isn’t. It’s just lots of people voting with their voices and some of those voices are downright loony.
Yelp has another problem. It claims that it “does not extort local businesses or manipulate ratings…there has never been a connection between ratings or reviews on Yelp and buying advertising.” Lawsuits that make that claim routinely lose. Yet, businesses refuse to believe that something fishy isn’t going on.
Yet the U.S. 9th Circuit Court of Appeals effectively gave Yelp the right to play by its own rules:
“The business owners may deem the posting or order of user reviews as a threat of economic harm, but it is not unlawful for Yelp to post and sequence the reviews..As Yelp has the right to charge for legitimate advertising services, the threat of economic harm that Yelp leveraged is, at most, hard bargaining.”
Yelp is still in need of serious crisis PR to solve this problem. Meanwhile, while Yelp stock revenues grow, Yelp stock price is not driven by profits.
Yelp stock had operating losses of $8.9 million in FY 13, a tiny profit of $11.06 million in FY14, operating losses of $21.3 million in FY15, and $4.98 million in FY16. TTM operating profit is a mere $19 million. And Yelp stock has a market cap of $3.47 billion. That’s crazy.
Sure, revenues are growing and rather nicely: $377 million in FY14 gave way to $549 million in FY15 and $713 million in FY16. Yet now it is slowing, with TTM revenues of $820 million. Free cash flow is starting to get somewhere, about $160 million in the TTM.
But look, there’s nothing that Yelp does that is unique. Business owners have to deal with crazy and juvenile reviews. As a user, I don’t even trust it because so many users are unsophisticated and leave two sentence reviews that do no good.
Most if its revenue comes from advertising, but how long will that last, especially considering the company doesn’t make money. How long before the reputational issues catch up to it? This can only end badly. Sell Yelp stock if you own it and don’t buy it.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
