Yelp: A Low Review For Value

Aug. 13, 2020 9:45 AM ETYelp Inc. (YELP)
Paralia Capital profile picture
Paralia Capital


  • Cancelled contracts were not reflected in Q1 so the worse is likely to come.
  • Yelp has free cash flow but in my view it is not a good proxy of shareholder value.
  • Yelp's value proposition is likely to decrease due to Covid-19.
  • The best way to profit is to use options for longer term underperformance versus peers.

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Yelp is in a bad spot coming out of this shutdown. Prior to the Coronavirus, it had rough relationships with its advertising customers and the current environment only makes it worse. Management takes money out to pay developers yet they never develop anything new. And the worse might be coming during Q2 or Q3 earnings since terminated contracts were likely not reflected in Q1. On top of that, their largest segment of paying customers are small service based businesses which are the ones suffering the most during this pandemic. But at this valuation I can't justify borrowing shares to short since their business model is profitable, they have a decent balance sheet, and a large user base with increasing reviews. Instead I believe the best way to approach Yelp is to capture the future underperformance versus its peers.

Business Model

Yelp provides a mobile application and website which allows its users to post reviews on businesses from restaurants to handyman services. Yelp monitors these reviews heavily and often takes down fake reviews or paid reviews which makes consumers feel secure. They also verify the business license(s) of companies listed for a fee and offer other services such as reservations or delivery through the application. The company’s main focus is on local businesses and offers the them free and paid advertising. Historically over 90% of their revenue comes from targeted advertising to their users by businesses(also called sponsored listings). Although restaurants have the most reviews and user activity, the majority of ad revenue comes from home & local services.

From Yelp's 2019 10-K

Customer Experiences

Using Yelp to find a great new restaurant is an

This article was written by

Paralia Capital profile picture
I am a bottoms up investor mainly looking for long & short small/micro cap ideas. I will be focusing on consumer, B2B and under the radar SAAS. On the short side, I look for companies with unfavorable secular trends and bad balance sheets. Will post occasionally options trade or deep value style ideas.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in YELP over 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.

Additional disclosure: I may initiate a short position pre-earnings and/or if the price goes above $30 per share.

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