There's Still Time to Short Yelp
Yelp (YELP) has been on a terrible run over the last couple of quarters as the stock is currently hovering near all-time lows. I called Yelp a short when it was trading at over $90. With the stock now trading at under $23, many investors may see it as a buying opportunity. However, I still think Yelp is a terrible investment and it is a value-trap that investors should avoid at all costs. There are many things that make me believe Yelp still has a lot of room to fall, which is why I still think it is a great short candidate.
Bad business model
Despite the fact that Yelp’s revenue is growing at a good speed, the company is still not on course to report a profit for many more quarters. This is primarily because Yelp has been spending money at a faster rate. Yelp’s expenses have spiraled out of control and have been growing every quarter. In addition, the company has failed terribly with its acquisitions as well. The company bought Qype for over $50 million in 2012 so as to expand its presence on the international front. However, the acquisition has been a complete disaster as after three years, international sales only accounted for 3% of the company’s revenue. Similarly, the company’s $124 million acquisition of Eat24 hasn’t been successful either.
All in all, Yelp has burned through cash at a very fast rate and has nothing to show for it. The company’s operating expenses have increased to over $420 million in the last 12 months, and this trend is expected to continue.
Spending for expansion can be a good thing, however Yelp is facing intense competition from many companies like Twizoo and Zomato. Twizoo’s programmers use data mining algorithms to collect the data (restaurant reviews) from Twitter. So, while Yelp spends millions of dollar to collect this data, Twizoo’s algorithm enables it to do it for free. Although Twizoo has a small reach, the company is expanding to places like San Francisco, Chicago, New York and Washington, DC. Yelp has a big presence in these places, and Twizoo’s arrival will definitely hurt Yelp’s growth.
Acquisition is a pipe dream
Yelp bulls may be hoping for an acquisition to drive the stock higher, I don’t think it is viable. Given the amount of money Yelp is spending, despite the increasing competition, I think the stock is far from a bottom. Also, as explained above, Yelp’s business model lacks long-term sustainability, which makes an acquisition highly unlikely. Yelp is competing against companies with way better business models, which is why I think no firm will be willing to spend over a billion dollar on acquiring Yelp.
Despite dropping to 52-week lows, Yelp still commands a trailing P/E of over 50. What makes it worse is that Yelp forward P/E stands at a staggering 282. This implies that Yelp’s earnings are expected to diminish considerably in the next 12 months. In addition, Yelp has a beta of 1.55, which makes it a very risky stock to hold in the current volatile market. All the reasons mentioned above reasons paint a dim view of Yelp’s future, which is why I think the stock is still a short.