Yelp Is Headed Towards Another Year Without A Profit

| About: Yelp (YELP)


Yelp's quarterly results beat the analyst estimates by a little bit but the results were nothing to write home about.

The company's growth rate continues to slow down, dilution continues to increase and monetization of content is very poor.

The company's future guidance calls for further slow down in growth, more dilution and lack of profitability.

At the current valuation, the company is still too expensive and it is mostly a speculation.

On Wednesday in the after-hours, Yelp (NYSE:YELP) announced its results for the quarter. While the company slightly beat the estimates, it still failed to post a profit, and to make matters worse, it offered guidance for the full-year that calls for a loss.

Yelp posted a loss of 4 cents per share while the analysts were looking for a loss of 6 cents per share. Furthermore, the company generated $76.4 million in revenues, up 65.6% from the same quarter of last year. The analysts were looking for revenues of $75.1 million.

Yelp conveniently reports only year-to-year growth rates which makes the results look better than they are and hides the slowing quarter-to-quarter growth. It's difficult to talk about seasonality in Yelp's business, so looking at quarter-to-quarter growth is as essential as looking at year-to-year growth.

Last quarter, Yelp generated $70.65 million in revenues and 3 cents per share in net loss. Compared to the last quarter, Yelp's revenues grew by 8.14% which is nothing to write home about for a company that trades for such a high valuation. Don't get me wrong, Yelp's growth rate is impressive; however, this is more than baked in the company's share price. When Benjamin Graham was asked about whether a particular stock was a good buy or not, he asked them "at what price?" There are rarely bad stocks or good stocks, rather, there are stocks where the current valuation is cheap or expensive. Yelp is one of those stocks where the valuation continues to be expensive despite a sharp correction in the recent weeks.

Last quarter, Yelp spent $38.85 million in sales and marketing which rose to $45.12 million this quarter, representing an increase of 16.13%. This means that Yelp's sales and marketing expenses grew twice as fast as its revenues did since the last quarter (roughly 16% vs. 8%). Product development costs rose from $11.80 million to $13.98 million while General and Administrative costs fell from $13.46 million to $13.17 million. All in all, Yelp posted a loss of $4.60 million from its operations, up from $1.91 million in the last quarter.

Meanwhile, Yelp's share count continues to rise sharply. As of last quarter, the company's average diluted share count was 71.17 million, up from 68.86 million in the last quarter. As the company's share count grew by 3.35% between the last quarter and this quarter, this did not benefit the shareholders at all as all of the money went to executive stock options.

When we look at Yelp's balance sheet, we see that cash reserves grew from $389 million to $399 million and total assets rose from $516 million to $533 million. As a result, the company's book value rose from $486 million to $500 million. While this is a move in the right direction, this looks like a rounding error compared to Yelp's market value of $4.15 billion.

Yelp reported cumulative reviews of 57 million (up 46% from last year) and average monthly unique visitors of 132 million (up 30% from last year). For the quarter, Yelp attracted about 396 million visitors which translated into $76.4 million in revenues. This tells us a lot about Yelp's monetizing ability as the company effectively generated 19 cents of revenue per each visitor. At this rate, Yelp's profitability is in serious question.

Here is the worst part though, for the second quarter of 2014, Yelp expects to generate $85-86 million in revenues and for the full-year of 2014, the company expects to generate $363-367 million. For the second quarter, we are looking at a quarter-to-quarter revenue growth of 11.25%, and for the full-year, we are looking at a year-to-year growth rate of 57%. In 2013, the average quarter-to-quarter revenue growth rate was 14.51% and the year-to-year revenue growth rate was 69%. Obviously Yelp's growth rate is slowing down both quarter-to-quarter and year-to-year basis.

More importantly, Yelp will continue to lack profitability at least until 2015, if not beyond. For the full-year of 2014, Yelp expects its "Adjusted EBITDA" to be $56 to $60 million. This adjusted figure excludes $43 to $45 million in stock-based compensation. The company expects another $18-19 million in depreciation and amortization costs, which would move the company in the red zone. In other words, Yelp's management just guided for another year of loss as well as slowing growth.

Yelp has very high stock-based compensation figures because the company rewards its management pretty generously. Of course, this keeps increasing the dilution each quarter and the company's investors are being punished for that. For example, in the same quarter of last year Yelp generated $0.73 per share in revenues compared to this quarter's $1.07 per share. The year-to-year revenue growth rate falls from 66% to 47% when we look at per-share basis because the company has a lot more shares in the market than it did last year, and by next year, it will have a lot more shares than it does right now. So, not only do we see a slowdown in the company's revenue growth, we are also looking at increased dilution, which will act as another speed bump for the company in per-share basis financials.

Last year, when Yelp was in 60s and 70s, I kept talking about how the company was overvalued. When the share price kept climbing, some reader told me that "I should admit being wrong and move on." A few months later, Yelp's share price fell sharply and the company is still undervalued. The growth is slowing, profitability is nowhere to be found, dilution is ever-increasing and competition (Google, Facebook) is catching on. Also, Yelp's current monetization of 19 cents per viewer (per quarter) is very weak and Yelp continues to increase its revenues by increasing its marketing expenses rapidly. At this point, Yelp is a speculation rather than an investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.