Yelp (YELP) is quite the interesting stock for a number of reasons:
- One quarter of its float is short, down from about half of its float three months ago (that's how Yelp came to my attention). A lot of short sellers seem to have lost confidence.
- There was substantial selling by insiders.
- Yelp trades at 15 times sales and is losing money.
- It outperformed Facebook (FB) and Groupon (GRPN) in the last six months.
- Yelp is up about $5 since the lockup expiration.
Yelp's strategy seems to depend heavily on expansion, which is costly and might turn out to be much less profitable than IPO "investors" hoped for. I don't want to overemphasize the similarities between Groupon and Yelp, but Groupon is to a small extent similar to Yelp in that both pay people to call local businesses and try to talk them into spending money on their online services in order to attract customers. And both business models are geared toward strong expansion.
However, when compared to Yelp, Groupon seems to be cheap. Groupon's P/S ratio is 1.5 -- one-tenth of Yelp's. But still I wouldn't buy Groupon. Of course, that is just one metric. For those of you more interested in what Yelp is worth, there is a excellent Seeking Alpha article on Yelp's valuation that you can find here.
So, how does Yelp make money?
People Google terms like "restaurant San Francisco" and one of the first suggestions will be Yelp. When they click on it, Yelp shows them a few beautiful pictures from top restaurants. These restaurants often pay Yelp to be among the first search results. That is, in a nutshell, how Yelp generates revenue.
This may, however, be short-lived revenue. According to one article I read, in some cases customers effectively pay $600 per 1,000 impressions and stop paying Yelp after finding that out.
But Yelp is only popular in big U.S. cities. If you don't believe me, Google "restaurant Frankfurt" (Germany) instead of "restaurant San Francisco" and you'll see that Yelp isn't even on one of the first 10 pages of search results (I didn't bother to look past pg. 10). Services similar to Yelp have long ago filled Yelp's spot in different countries. In Germany, one such service is Prinz, which is the first non-Google search result in my example.
That brings me to Yelp's biggest problem: Google. Google itself offers practically everything Yelp does. Most of the time when I'm trying to find a decent restaurant I already am out in the street, in which case I simply use Google Maps on my smartphone. Also, Google last week launched a service that does certain things Yelp does. It probably will be integrated seamlessly into Android and will likely be embraced by users around the world who know the Google brand, but don't know the Yelp brand. Google's new service called Field Trip looks great, but still needs time (and as of now is only available on Android and in the U.S.). What does Field Trip offer that threatens Yelp? Field Trip informs smartphone users about points of interest, including restaurants and deals. It shows Zagat scores for restaurants, but doesn't show Yelp reviews. And it will come to iOS, thereby lowering the relevance of Yelp because it offers an alternative to Apple's (AAPL) mapping service for some applications and lowers the probability of using Siri (Siri uses Yelp for restaurant reviews) to search for local restaurants.
While Android users can already live without the Yelp app, IPhone users with iOS 6 and without Google Maps on their device can still make good use of it. Reading a few of the reviews Yelp's smartphone app got in the app store, I found out that some users are suspicious about the credibility of Yelp restaurant critics who, in some cases, review as many as 300 restaurants. Users often express disappointment over the limited capabilities of the mobile app. Apparently you have to log on at your computer to post a restaurant review. I think it is safe to assume Yelp will soon enhance the capabilities of its mobile apps because there is room for improvement.
Another point I already mentioned is Yelp's problem in terms of becoming relevant internationally. To see some of the discrepancies in how users' opinions on Yelp vary from country to country, I went to iTunes stores from different countries. Here are the ratings the latest version of the app has garnered in selected countries:
I looked up more countries and 4.5 stars was the best I could find, but it is only based on 11 reviews and "all versions" also had 3.5 stars in France with 314 reviews. Also, what the number of reviews show is that Yelp does not have a broad user base outside the U.S. The German version, for example, has merely 576 reviews for all versions, while the U.S. version has 153,066 reviews. Yes, Yelp is available around the globe, but as of now it is mostly used in the U.S.
All that said, you would probably think Yelp makes a good short, but I would not short the stock. In fact, I already shorted it once before and made a small profit, but I was lucky and won't try it again anytime soon. There seems to be strong momentum for the stock, because even after some decent insider selling on Sept. 12 at $24.74, it kept on going higher to over $28 and now is already about $1 above analysts' average target price. I would guess CEO Jeremy Stoppelman (the insider) has an idea of what a good selling point is. Even though I think the future holds more risks than opportunities for Yelp, I decided to leave the stock alone. Yelp's volatility is certainly strong. I have the feeling that many bears are waiting for a level close to the stock's all-time high of $31.96 before shorting it again. I would like to hear about some option strategies for Yelp, so please leave a comment if you have any suggestions.
Without a doubt, Yelp is a more useful service than Groupon and many users seem to really enjoy what Yelp offers. For irrational reasons, those same people might buy the stock (which by no means can be considered cheap) while others buy it for technical reasons. My best advice is to leave the stock alone as it has more downside than upside potential.
If you, like me, have a strong urge to short the stock, let it test its all time high around $32 before you do anything. If you do short the stock now, use Yelp to find a good masseuse near you because you will need some stress relief.