Can Yelp Guide You Toward Profits?

With shares of Yelp (NYSE:YELP) trading at around $19.39, is YELP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Let’s start about by saying that more people hate Yelp than love it. At least this is true from an investing standpoint. At the present time, 55.20 percent of the float is short, which is exceptionally high. Shorts aren’t always correct, but when you see numbers this high, they’re correct a lot more often than they’re incorrect. It shows a lot of conviction, and that conviction has to come from somewhere.

The first and most obvious negative is that Yelp isn’t profitable. In addition to that, we have seen decreasing net income since 2009, the profit margin is a miserable -18.83 percent, guidance has been lowered, and it’s possible that many Yelp reviews have been paid for, which defeats the purpose of the site. Feeling nice and cozy yet? Let’s not also forget that Apple (NASDAQ:AAPL) is rumored to be interested in FourSquare. If a deal like this were made, it could eventually have a severe impact on Yelp.

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On the positive side, Yelp has an Alexa ranking of 232 and a U.S. Alexa ranking of 59. That alone has tremendous value. With tens of millions of visitors per month, traffic isn’t a problem. Therefore, monetization of that traffic should be easy. While the revenue has been there, the earnings have not. Yelp’s app is currently average 8.2 million uniques per month, which is excellent, and this number should continue to grow. Another potential positive is that Yahoo (NASDAQ:YHOO) just added Max Levchin to its board. It might be a longshot, but since Levchin is Chairman of the Board at Yelp, it’s possible that some form of deal could take place in the future.

Now let’s take a look at some numbers.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Yelp is excellent. The balance sheet is also in great shape.

Debt-To-Equity

Cash

Long-Term Debt

YELP

.00

$123.08 Million

$0

YHOO

.00

$8.41 Billion

$127.53 Million

 

T = Technicals on the Stock Chart Are Mixed

Yelp hasn’t been public long enough to get a good gage on the stock’s performance.

1 Month

Year-To-Date

1 Year

3 Year

YELP

12.55%

-1.27%

N/A

N/A

YHOO

8.40%

19.96%

25.49%

22.94%

S&P 500

3.79%

16.06%

18.19%

37.57%

 

At 19.39, Yelp is currently trading below all its averages.

50-Day SMA

21.80

100-Day SMA

22.51

200-Day SMA

21.92

 

E = Earnings and Revenue Are Inconsistent

Annual revenue has been impressive while earnings have not.  

2008

2009

2010

2011

2012

Revenue ($)in millions

12.14

25.81

47.73

83.23

N/A

Diluted EPS ($)

-.16

-.19

-.71

-1.10

N/A

 

A similar story can be told on a quarterly basis when you look at YoY.

9/2011

12/2011

3/2012

6/2012

19/2012

Revenue ($)in millions

22.30

24.90

27.38

32.65

36.37

Diluted EPS ($)

-.24

-.59

-.31

-.03

-.03

 

T = Trends Support the Industry, But Not the Company

It might look as though Yelp is well positioned, but there are too many bigger competitors that can outmaneuver Yelp with ease. Google and Yahoo are the biggest threats, but there are many other potential threats out there. Currently, 70% of Yelp’s revenue comes from advertising. That’s nice, but Yelp needs to be a lot more creative when it comes to monetization methods. Otherwise, it will be old news fast.

Conclusion

It’s amazing that Yelp employs more than 850 people. The majority of these people are in sales. If this is the largest cost and the primary reason Yelp isn’t making money, it would obviously make sense to cut those costs. With that much traffic on the site, advertisers will come to them. It will require employees to field inquiries, but nowhere near 850. Another option is to sell travel eBooks related to the areas in which people are searching. eBooks are a great monetization method. Hiring writers to write these books would be less costly than employing a massive sales force. This is just one of many potential ideas for monetization of the site.

There has been a lot of insider selling recently in Yelp recently. This makes you wonder if Yelp went public because the company knew it was in trouble.

If you’re considering an investment in Yelp, then the following information might be of interest to you. This is from Yelp:

“We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to achieve or maintain profitability. Our recent growth rate will likely not be sustainable, and a failure to maintain an adequate growth rate will adversely affect our results of operations and business; …”

Enough said. Yelp is a STAY AWAY.

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