Yelp Will Slowly Become IrrelevantYELP) has been a very volatile stock and I have never liked it. However, the stock has rallied considerably in the last few weeks as the company delivered better-than-expected results. In addition, the news of David Einhorn’s Greenlight Capital disclosing a stake in the stock also added fuel to the rally.
Although the stock has rallied strongly, I think investors should stay away from the stock for the time being. Investors who have held the stock for a long time should use the recent rally to exit the stock and cut their losses as Yelp will probably move lower again and the reasons for this are mentioned below.
Greenlight Capital Doesn’t Have A Meaningful Stake
Although Yelp’s stock rallied on the news that Greenlight Capital disclosed a stake in the company, the hedge fund doesn’t have a big enough position.
Although Einhorn performed terribly in 2015, his bet on Yelp seems to have played out perfectly as the stock has risen considerably over the last few weeks. Better-than-expected earnings propelled the stock higher, but investors shouldn’t expect Yelp’s rally to continue due to several reasons.
First off, Yelp has been losing money every year since it has been operational and the earnings beat may be a one-off thing. Yelp is facing a lot of competitive pressure, and its toughest competition is probably is Google.
The main problem with Yelp’s business model is that many people access it through Google. Google has started to display restaurant reviews when people search for Yelp and as Google’s review-base grows, Yelp will slowly become old news.
In addition to Google, Yelp is also facing competition from giants like Facebook, and smaller companies like Twizoo and AroundMe. Given the increasing amount of competition, it is unlikely that Yelp will sustain its recent rally. The company is already losing money and the growing competition will soon curb its revenue growth as well. Hence, investors should not be bullish on Yelp because of its Q1 results or Einhorn’s stake as the stock will likely move lower in the long-term.
Increasing competition will probably make Yelp irrelevant in the long-term. While traders can still benefit from the stock, I would advise long-term investors to stay far away from it. If you have been a long-term Yelp investor, you should use the recent rally to exit the stock and cut your losses.
Published on May 19, 2016By Prudent Investor