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Why Yelp Stock Tumbled 23% Last Month

Jeremy Bowman, The Motley Fool

What happened

Shares of Yelp (NYSE: YELP) were taking a dive last month after the business-recommendation site offered disappointing guidance in its first-quarter report. According to data from S&P Global Market Intelligence, the stock finished May down 23%.

As the chart below shows, the bulk of the stock's losses came on May 10 after the earnings report came out.

YELP Chart

Yelp data by YCharts.

So what

Despite providing a useful service to millions of internet users, Yelp has struggled to break through in a digital advertising ecosystem dominated by Google and Facebook and monetize its platform to its potential. Its first-quarter results offered the latest evidence of these challenges, as revenue in the period grew just 6% to $236 million, though that was at the high end of management's guidance and essentially in line with analyst estimates.

A young man looking at his smartphone on the street.

Image source: Getty Images.

Growth in restaurant reservations was a bright spot in particular: The number of diners seated increased 43% sequentially and 240% from the quarter a year ago. During the seasonally slow quarter, its bottom-line result improved from a loss per share of $0.03 a year ago to $0.02, topping estimates by a penny.

CEO Jeremy Stoppelman signaled that 2019 would be a transitional year as the company works on "initiatives including diversifying our go-to-market strategy, delivering new business products, driving greater monetization, and offering more value to our clients."

However, management's guidance of 4% to 6% revenue growth for the second quarter was below expectations, prompting the sell-off. Nonetheless, the company guided to full-year revenue growth of 8% to 10%, indicating stronger performance in the second half of the year as its recent investments begin to deliver results.

Now what

In the aftermath of the report, analysts again signaled negativity on the stock as B. Riley downgraded shares from neutral to buy and cut its price target from $50 to $42, saying the company was losing its pricing power. Citi also weighed in, noting that revenue in the growth was the slowest in the company's history and suggested it may not be able to deliver on its full-year guidance since the company is assuming a significant acceleration in top-line growth.

Yelp has already disappointed investors a number of times in its history. At this point, the market is unwilling to give it the benefit of the doubt.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Facebook. The Motley Fool recommends Facebook and Yelp. The Motley Fool has a disclosure policy.