Seeking Alpha
Long only, deep value, growth at reasonable price, carmakers
Profile| Send Message| ()  

We live in an age when all news is good news. On Wednesday evening, Yelp (YELP) announced its results for the quarter and the results were just as I suspected and the investors of the company are celebrating these results even though there isn't much to celebrate for in these results.

Yelp was able to beat the lowered estimates of the analysts, but this was already expected, evidenced by the massive run-up in the company's share price in the recent months. In fact, since November, Yelp's shares have appreciated by nearly 30% due to the expectations that the company would beat the estimates.

Yelp generated $70.7 million in revenues and a loss of 3 cents per share in net profits while the analysts were looking for $67.3 million in revenues and a loss of 3 cents per share. The company's revenue beat the estimates but the net profit figure was in-line with the expectations. For the full-year, Yelp generated $233 million in revenues and 15 cents per share in net loss. Basically, 2013 was another profitless year for Yelp.

For the full-year of 2014, Yelp guided for revenues of $356 million. Between 2009 and 2012, Yelp's revenues grew by an annual average of 74.87%. Last year, the revenue growth rate slowed down to 69.37% and in 2014 it is expected to slow down further to 52.79% according to the company's guidance. Basically, Yelp told us that its growth rate will fall from mid-70s to low-50s by the end of this year and the investors are celebrating this. I understand that 53% is still an impressive growth rate; however, Yelp's current share price more than bakes that into account. When we look at quarter-to-quarter growth, the company's trailing average growth rate is around 14.51%, while the guidance for the first quarter of 2014 calls for a sequential growth of 4.74%, a much slower rate. Yelp expects a sharp drop in its growth rate in 2014, especially in the first part of the year.

As if Yelp wasn't already ridiculously overpriced, the company also keeps increasing the dilution for the shareholders. This comes from issuing new shares and paying many employees in stock options. In fact, issuing and selling stocks have become something like a business plan for the company, and perhaps its only hope of making a profit. In 2011, Yelp had 15.29 million outstanding shares which rose sharply to 54.15 million in 2012 and it rose further to 65.69 million in 2013. Currently, Yelp has 68.86 million outstanding shares, giving the company a market value of $5.51 billion (compared to the company's book value of $486 million). Currently, Yelp trades for 10 times its book value and 22 times its revenue.

To add insult to injury, Yelp is not expecting to be profitable in 2014 either. Here is what the company reported: "Adjusted EBITDA is expected to be in the range of $54 million to $58 million. Stock-based compensation is expected to be in the range of $43 million to $45 million, and depreciation and amortization is expected to be approximately 5% of revenue." Yelp's "adjusted EBITDA" doesn't include stock-based compensation or depreciation and amortization. Since the company expects its 2014 revenues to be $356 million, its depreciation and amortization charge will be around $18 million and its stock based compensation will be around $44 million. Before we add taxes or other expenses, we are already at a loss of $6 million dollars when we add stock based compensation, depreciation and amortization to the company's adjusted EBITDA guidance. This guarantees that if Yelp doesn't beat its guidance by a large margin, it will have another unprofitable year.

By the way, Yelp's stock-based compensation was $4.87 million in 2011, $14.88 million in 2012, $26.12 million in 2013 and it is going to be $44 million this year according to the company's guidance. Yelp just turned into a machine where management cashes out their stock options on monthly basis while profits will not be seen anytime soon, if ever. At this rate, the number of Yelp's outstanding shares will be far above 70 million by this time of next year. Currently, the company's CEO Jeremy Stoppelman doesn't even hold a share of the company because he sells every share he is awarded within 24 hours, just like most other senior managers at the company.

In the near future, most of Yelp's growth will come from outside of North America where the company is reaching saturation. This is why Yelp is entering new markets such as Norway, Portugal, New Zealand, Brazil and Turkey in order to boost its growth numbers. The problem is that while Yelp can grow its user base in these countries at a rapid rate, it can't grow its revenues that quickly. As we know from Facebook (FB) and Google (GOOG), an American or Canadian viewer will generate as much advertising revenue as 2-3 European viewers and 5-10 viewers from other parts of the world. Yelp doesn't tell us much information about metrics. For example, we don't know the distribution of the website's users by geographical region other than saying that 21% of the page views come from outside of the US (during the conference call, the company also announced that the international revenues represent 4% of total revenues for the company while representing 21% of the page views.

Since the company's total page views for the quarter was 120 million and total revenues were $70.7 million, we can calculate that 25.2 million viewers came from international markets and 94.8 million viewers came from the US. If we look at the averages, the average American viewer generated 71 cents in revenues whereas the average international viewer generated 11 cents in revenues. Since most of Yelp's future growth will come from the international markets, this doesn't bode well for the company). Also, keep in mind that if Yelp got nearly 95 million unique visitors in the US, the company is pretty close to reaching saturation. Not everyone in the country will check an online review site to find a barber or a restaurant since many people already know where to do their shopping in their town. Besides, the competition is barely getting started since Facebook and Google both have their local business solutions now. Until now, Yelp enjoyed nearly no competition but things are changing as we speak.

Yelp is currently valued for perfection and the company's current valuation reflects 50-60% annual growth rate for more than a decade but the company's growth is already slowing down. In Yelp's guidance and earnings report, there is very little to cheer for and very much to be worried about. Yelp's management will continue to reward themselves with stock options while they dilute the shareholders of the company relentlessly.

Source: Are Yelp's Investors Cheering For Slowing Growth And Lack Of Profitability?