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3 Reasons To Be Bearish On Yelp Inc Stock

Tom Taulli

Not long ago, the situation did not look so rosy for Yelp Inc (NYSE:YELP). But the company has taken swift actions, which Wall Street has applauded. Since late June, YELP stock has gone from $30 to $46 — with the market cap reaching $3.8 billion.

3 Reasons To Be Bearish On Yelp Inc Stock

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A key has been the company’s unloading of its food-ordering business, Eat24, to GrubHub Inc (NYSE:GRUB). This resulted in an influx of $287.5 million in cash (Yelp purchased the company in 2015 for $134 million). What’s more, YELP and GRUB entered a strategic relationship. According to CEO Jeremy Stoppelman: “This partnership will enhance our consumer product offering in Yelp’s highest trafficked category by adding tens of thousands of additional restaurants for online ordering and delivery.”

But this was not the only positive for the YELP stock price. The company has also posted profits for the past two quarters.

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So all this is great, right?

Yes. But I still think there are some challenges, which could make it tough for the YELP stock price. Let’s take a look at three:

Issue #1 With YELP Stock: Intense Competition

Competition has always been problem for YELP. Just some of the company’s fierce rivals include Kudzu, IAC/InterActiveCorp’s (NASDAQ:IAC) Angie’s List Inc, Urbanspoon, Priceline Group Inc (NASDAQ:PCLN), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB).

Now it’s true that YELP has done a pretty good job in holding its ground. It certainly helps that the company has a well-known brand, a solid app and has invested in its infrastructure.

But, then again, some of the rivals are juggernauts, with enormous resources and massive user bases. In fact, GOOGL is perhaps the biggest threat. Here’s what YELP notes in a recent SEC filing: “Because Google in particular is the most significant source of traffic to our website, accounting for more than half of the visits to our website during the three months ended September 30, 2017, our success depends on our ability to maintain a prominent presence in search results for queries regarding local businesses on Google. As a result, Google’s promotion of its own competing products, or similar actions by Google in the future that have the effect of reducing our prominence or ranking on its search results, could have a substantial negative effect on our business and results of operations.”

Issue #2 With YELP Stock: Growth

Yelp is definitely at the center of several megatrends, such as social media, digital local advertising and mobile. However, the growth has still not been impressive, at least compared to others like FB.

For example, YELP has put out guidance for fourth quarter revenues that ranges from $211 million to $216 million . But Wall Street had a much more robust estimate of $234.3 million.

Oh, and the full-year forecast was light, at $839 million to $844 million. This was actually down from the August guidance of $855 million to $865.

Now, there are several reasons for this. As mentioned already, the competitive environment is only getting more intense. But at the same time, the local ad market can be tough, since small businesses are often resistant to spend money.

Issue #3 With YELP Stock: Valuation

YELP stock is definitely pricey, with the forward price-to-earnings multiple of 125. According to InvestorPlace.com’s Luke Lango: “Long story short: Yelp is a low-growth, low-moat player … Consequently, YELP stock featuring a richer valuation than Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) makes no sense.”

And Wall Street analysts — who tend to be on the optimistic side of things — are not so bullish either. After all, the average price target is in-line with the current value of YELP stock.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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