Facebook Puts Yelp On The Road To Irrelevancy

| About: Yelp (YELP)

Facebook (NASDAQ:FB) made a major well-publicized announcement yesterday. The company unveiled a social search tool that will leverage the data on its one billion members. This effort is seen by analysts as a shot across the bow of Google (NASDAQ:GOOG), LinkedIn (NYSE:LNKD) and Yelp (NYSE:YELP). My take is Google has little to worry about at this point as it is hard to see how this effort will impact its huge market share of web search and near monopoly on mobile search. Likewise, LinkedIn's models should be safe as most people want to keep their business and personal lives separate. However, this is a major blow to Yelp, a company I have been negative on and a stock I have been short since it was trading at $27 a share. Consider how Facebook's new search tool could upend Yelp's business model or at least take significant market share.

Yelp's Model: Get reviews on restaurants, movies, shops etc… by what strangers are saying.

Facebook's Model: Get reviews on restaurants, movies, shops, etc… by how they are perceived by your friends and close associates.

It seems hands down that Facebook is on the way to building a much better mousetrap. In my opinion, YELP was already significantly overvalued and this new move by Facebook could put the company and its stock on the road to irrelevancy.

Four reasons YELP is already overvalued at $20 a share:

  1. Let's start with the obvious. The company is losing money. It is tracking to a loss of 30 cents a share in FY2012. Analysts currently have it making two cents a share in FY2013, but consensus estimates have fallen over the last three months, so I would not put a lot of faith in assuming the company makes a profit this year.
  2. Insiders continue to sell large chunks of shares and unlike a lot of recent IPOs like Facebook, it does not have a huge cash hoard on its balance sheet (net cash is less than 10% of market capitalization).
  3. The stock sells at more than 10x annual revenues and almost 9x book value.
  4. Northland Securities downgraded the shares a few days from Facebook's announcement from "Market Perform" to "Under Perform." Look for more downgrades in coming weeks as analysts factor in Facebook's announcement.

Disclosure: I am short YELP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.