Useless Yelp Is About to Tank

Following Yelp’s (YELP) unforeseen earnings beat, analysts have been pouring in with upgrades and raised price targets. The bullishness has pushed Yelp’s stock higher by over 25% since the earnings release. Yelp may have moved higher after the earnings release, but I think the stock will return to the sub $20 range soon enough. As a result, I think investors should use this rally to short Yelp again.

My record with Yelp

I have been bearish on Yelp for a really long time. I recommended shorting the stock back in 2014 when the company was trading over $90.
Since then, Yelp has lost a considerable amount of value and my bearish stance has resulted in great profits.

In a recent article, I also recommended investors to cover their short positions as I thought Yelp’s short-term downside was very limited and the stock could easily shoot higher. When I recommended to cover, Yelp was trading at roughly $18, and has moved higher by over 40%.

The primary reason for shorting Yelp back in 2014 was the stock’s super-high valuation and growing competition from giants like Google. Google is slowing growing its presence through Google+ Reviews, and would likely make Yelp useless in the long-term.

Amid growing competition, Yelp has also been reporting wide losses. Although Yelp did post significant revenue growth in the meantime, a part of my short thesis included ignoring the company’s top-line growth and instead focusing on the lack of profitability.

I have recommended shorting companies that lack earnings power several times in the past and a majority of those suggestions have been profitable. The likes of SolarCity, SunEdison, DryShips, Pandora, and Westport have all been my successful short recommendations.

Due to the fact that Yelp’s revenue growth has been consistently been outpaced by its marketing expenses, I don’t think Yelp can ever be profitable, which is why investors should short the recent rally.

Only one hope

The only hope for Yelp investors now is an acquisition. Without an acquisition, Yelp’s shares will surely move lower. I have said it many times in the past, buying a stock in the hopes of an acquisition rarely ends nicely. Investors have a better chance of benefiting from this rally by shorting Yelp than they have by going long.

With the company’s losses growing massively, I don’t think any company would want to buy Yelp now. That being said, I did not foresee the acquisition bid for Angie’s List (ANGI) by InterActiveCorp, so I can’t completely rule out an acquisition.
Published on May 26, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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