Yelp Inc (NYSE:YELP) stock produced another quarter of high revenue growth. Unfortunately for holders of Yelp stock, the company appears to have fallen short on profit after considering its sale of Eat24.
As a result, Wall Street sold off by more than 5% after hours. With the large rate of increase in both revenue and earnings per share (EPS), many consider YELP as a high-growth stock. However, with the rise of other search and social media sites, Yelp no longer offers a unique product. Given its outsized competition, the destiny of Yelp stock lies in a takeover — or a takeout.
Yelp Produced Strong Revenues and a Mixed Earnings Picture
The company’s Q4 2017 EPS came in at 19 cents per share. This number beat consensus estimates by 14 cents per share. While this is up from 10 cents per share in Q4 2016, the pre-tax gain from the sale of Eat24 is responsible for the increase. Yelp earned $218.25 million in the same quarter in revenue, a 12% year-over-year increase which beat estimates by $3.29 million.
The full year also provides a picture made better by the Eat24 sale. Net income for the full year came in at $152.9 million, or $1.75 EPS. However, when the $164.8 million sale of Eat24 is excluded, net income appears to be a loss without that sale. However, net revenue climbed 19% from 2016 levels, coming in at $846.8 million. Advertising accounted for $771.6 million of that revenue, with Eat24 making up most of the rest of the $53.9 million of the $60.3 million in transactions revenue. Other services accounted for the remainder of the revenue.
At first glance, Yelp stock appears poised for growth, especially with the divestiture of Eat24. With all types of businesses utilizing Yelp for reviews, the company has acquired a tremendous amount of data that allows it to target advertising, its primary source of revenue.
The company’s average annual revenue growth for the last five years has topped 53%. Further, the company remains on track to produce consistent earnings growth. It’s what happens in those years to come that remains in question.
Yelp Has Attracted Outsized Competitors
Yelp’s founders stumbled on a lucrative idea in 2004 when they created a site to leave online reviews. That launched a valuable social media resource and gave Yelp the name recognition the company enjoys today.
Unfortunately for YELP stock, the landscape has changed dramatically since the firm’s founding. Now, Facebook Inc (NASDAQ:FB) has established itself as the dominant general site for social media. Further, Google’s parent company Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) virtually rules internet search. These companies now compete with Yelp with Facebook Local and Google My Business respectively.
Since both of these companies can copy Yelp’s core offering, Yelp’s moat begins and ends with its name recognition.
Whether GOOGL or FB Would Take Over Yelp Is Unclear
If either Facebook or Alphabet so chooses, this name recognition is available to the highest bidder. Both FB and GOOGL have each attained a market cap more than 100 times higher than the $3.4 billion market cap of YELP stock. Either company can take a tiny fraction of the cash held on their balance sheets and buy this out.
Still, a buyout remains far from certain. With growth rates reminiscent of Chinese online companies like Alibaba Group Holding Ltd (NYSE:BABA) or JD.Com Inc (ADR) (NASDAQ:JD), the price-to-earnings ratio (P/E) has been bid to a stratospheric 187 times earnings!
While the likes of Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) command higher P/Es, their moats reach well beyond their name recognition. For investors to profit from a prospective buyout of Yelp stock, they have to assume that either Google or Facebook decides that buying out YELP costs less than building their review sites organically.
However, the high P/E reduces the likelihood of a buyout at current prices. While the chances of a buyout increase with a lower P/E, investors could easily lose money waiting for this buyout to occur. Hence, the “hope for a buyout” strategy provides no guarantee of easy gains.
The Bottom Line on Yelp Stock
Although the revenue and earnings growth of Yelp stock seems like a profitable investment to casual observers, Yelp’s competitive situation spells eventual doom for the firm. Without question, YELP has turned its valuable data into a lucrative advertising platform that produces outsized revenue and EPS growth.
Unfortunately for Yelp stock owners, two much larger companies — Alphabet and Facebook — have larger data sets and platforms competing directly with Yelp. Both tech giants will have to decide whether buying out Yelp or directly competing will produce higher returns. However, with a 190+ PE ratio, the buyout looks less likely. At this juncture, the risks involved with buying Yelp stock simply outweigh any potential rewards.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.