Here’s What Put Yelp on a Roller Coaster

Facebook (NASDAQ:FB) and Yelp (NYSE:YELP) have a problem in common: smartphone monetization. After the Social Network’s third quarter results revealed that its mobile advertising revenue grew significantly and Yelp reported that its third-quarter sales topped estimates, the company’s stock price began a roller coaster ride that resulted in a two-month high.

When the market opened on Wednesday, the company’s shares were trading at $25.58. After Yelp pre-announced third quarter revenue that was better than analysts expected, the stock rose 12 percent. It was further buoyed by Facebooks results and the announcement of company’s intended purchase of Qype, Europe’s largest local reviews site. However, by market’s close the stock had fallen to $25.77 per share. Yelp’s stock price fell further Thursday morning on the news that the patent troll Blue Calypso had decided to sue the review website.

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Seeking Alpha took note of the stock’s volatility, citing heavy short interest and the approach of third-quarter results as possible causes. The market analysis website published an article entitled “Yelp’s Gradual Decline” on October 24 that highlighted the company’s pressing need to penetrate smaller markets and to make its smartphone app profitable.

Yelp’s proposed acquisition of Qype should “help Yelp accelerate its expansion into Europe,” wrote Macquarie analyst Tom White in a research note. Since its founding in 2004, Yelp has penetrated all major cities in the United States. As the company expanded to English-speaking international cities and major European cities in 2009, it was able to generate strong top line growth, as the cities had many business able and interested in advertising with Yelp. After the company spread to all of the big, English-speaking markets, growth slowed; Yelp reported sequential decline in revenue per market for the first time in the first quarter of this year.

Smartphone monetization maybe a more difficult problem to solve. Yelp currently generates zero revenue from its smartphone app. It is a problem that many social media websites face. Facebook became the most well-known example, after its stock price dropped remarkably following the company’s initial public offering in May, but it is not the only company to struggle with mobile advertising.

However, Yelp has seen its shares increase 72 percent since its initial public offering in March. After reporting that sales for the third quarter that beat expectations on Wednesday, the shares advanced further. While the company is not set to release its earnings report until November 1, Yelp said its third-quarter sales will amount to $36. 4 million, which exceeded its prior forecast and that of analysts. Bloomberg reported that the company has partnered with Apple (NASDAQ:AAPL) to integrate local content into software for the iPhone and the iPad in an effort to improve its mobile app.

The good news was tempered by the patent infringement complaint filed by Blue Calypso on Thursday. The complaint stated that Yelp had made use of peer-to-peer advertising created and developed by Calypso. By 1 p.m. eastern standard time, shares had fallen by more than 6 percent, in part due that announcement.

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