On Tuesday in the after-hours, Yelp (YELP) announced results of another quarter where it failed to report a profit. The company reported a loss of 4 cents per share on revenues of $61.2 million (this represents a year-to-year growth of 68%). Yelp has a habit of spending more money than it makes and this habit might continue on for the foreseeable future.
Let's review the company's latest results first. Yelp's cumulative reviews grew by 42% in the last four quarters and the company's average monthly unique visitors grew by another 41%. Currently Yelp enjoys 47.3 million reviews and 117 million monthly unique visitors. There are currently 57,200 local business accounts on Yelp, which represents a 61% growth over the last four quarters. These are all good, right? Well, actually these are not that good if they don't turn into profits and this is exactly what we are seeing with Yelp. While the company continues to grow its user base, it spends more money than it generates in order to accomplish this.
Here is the funny thing: in its earnings presentation, Yelp only had 5 slides and none of the slides contained any information on the profitability of the company. All the comparisons were year-to-year and there was nothing on quarter-to-quarter growth rates. Yelp only provided the investors with the metrics where it looks strong, while those who wanted more details on the company's earnings had to dig deeper to find the actual numbers.
When we dig deeper into Yelp's numbers, we realize that in order to generate $61.2 million in revenues, the company had to spend $34.12 million on sales and marketing, $11.21 million on product development, $10.54 million on general administrative functions and $4.27 on other costs of revenue. Basically, generating $61.2 million in revenues costs Yelp $60.14 million (it totals up to $62.96 million if we include depreciation and amortization items). Similarly, year-to-date, Yelp spent $169 million in order to generate $162 million in revenues. Between the third quarter of 2012 and the third quarter of this year, Yelp's revenues grew by 68% while the company's operating costs jumped by 64%. This excludes the stock based compensation, which grew from $2.33 million to $7.10 million during the same period.
When we look at Yelp's balance sheet, we see that the company generated only $6 million in free cash flow year-to-date, which compares very weakly with the company's current market value of $4.5 billion. In fact, during this period, the company even diluted its share count from 61.26 million to 65.53 million. Furthermore, if we exclude the $9.33 million received by the company from its sale of additional common stock, it would have been cash flow negative for the year of 2013.
To make the matters worse, Yelp just announced that it would sell more shares in order to fund its operations. The company will be looking to raise $250 million, which will dilute the current shareholders and make each share even more overvalued. Perhaps, moving forward, selling more shares will be just part of Yelp's business plan. After all, this seems to be the only way the company can generate positive cash flow.
Now, let's take a look at the numbers Yelp didn't mention to us either in its report or during its presentation, quarter to quarter comparisons. Yelp only provided comparisons between the third quarter of 2012 and the third quarter of 2013 so that the company's growth looks more impressive. Many investors will be wondering how much growth Yelp saw since the last quarter and they will have to look at last quarter's announcement to find these numbers.
So, in the second quarter of the year, Yelp generated $55 million in revenues, enjoyed 42.5 million cumulative reviews, 108 million average monthly unique visitors and 51,400 active local business accounts. Now Yelp's growth rate doesn't look that impressive anymore. The company's quarter-to-quarter revenue growth is 10.9%, cumulative review growth is 11.29%, active local business account growth is 11.27% and average monthly unique visitor growth is 8.3%. By showing only year-to-year comparisons, Yelp was able to hide its slowing growth rates.
Companies like Yelp make me feel like we are back to year 1999. It looks like the investors haven't learned their lessons even though many of them lost everything they had when the tech-bubble collapsed. Why would investors value a company like Yelp at $4.5 billion which is 20 times its annual revenues? We can't even do a P/E or price-to-cash flow comparison because the company has never been profitable in its history.
Do I recommend shorting the stock then? Actually shorting a bubble stock is just as crazy of an idea as buying it. Investors that are looking to short this stock would be well-served by protecting their short position by coupling it with buying calls or selling puts. Then again, bubbles can last longer than many investors can stay afloat. Staying away from stocks like this seems to be the best idea at this time.
Apart from valuation, there are also other concerns surrounding Yelp. For example, many small business owners see Yelp as a "mafia" that "extracts money from them in order to protect their reputation." Regardless of whether it is true or not, Yelp needs to develop better relationship with small business owners if it wants to be profitable. After all, their biggest sources of revenue are small business owners, and any company that makes its customers mad won't stay in business for long.
Additional disclosure: I'm long YELP straddle (This is a practice of buying calls and puts at the same time in order to protect one's position from an extreme move in the opposite direction).