- Yelp shares have sold off wildly after the company crushed merger speculations that had propped the stock
- The company had earlier issued weak guidance for the current quarter
- Are there any growth catalysts left for Yelp?
It appears as if Yelp’s (NASDAQ:YELP) woes are not about to come to a close any time soon. Yelp stock price saw its first major tumble when it delivered poor first quarter results in May. The shares, however, got a much welcome reprieve when speculations surfaced that the company was mulling being acquired. The good tidings helped Yelp pare back most of its previous losses. But then, Yelp’s management has finally dropped the bomb by declaring that the company will not pursue a transaction in the immediate future, sending the shares tumbling 17% over the last couple of days. Yelp stock price is down 36.5% YTD, and are trading at 52-week lows.
Trading Yelp shares has been pretty rewarding for the shorts over the past one year or so. But for long-term investors, the question remains: is there any hope for a comeback for Yelp shares?
Google Yelp Standoff
If Yelp’s management is to be believed, the slowdown in the company’s growth can be pinned on Google and its search engine algorithm antics. Yelp has thrived in the past because it relies on two traffic channels: the company’s direct search business that helps users to search for Yelp content, and another larger channel where search function is farmed out to external search engines, primarily Google (NASDAQ: GOOG). The traffic Yelp gets from Google is in all likelihood bigger than the direct traffic on Yelp’s app, and is obtained at a tiny fraction of the customer acquisitions costs that Yelp typically spends trying to get people to download and use its app. While Yelp’s own search product remains important for core users, its relationship with Google has perhaps been contributing more to both its top and bottom lines.
Yelp alleges that Google favors its own SERP, or Search Engine Results Placement, to the detriment of organic search results by Yelp and other location based services. But here’s the rub with Yelp’s rant: Google has for long had a tendency to localize searches and promote its own services such as Google+. Why this has suddenly become a major obstacle for Yelp is anyone’s guess. Google performed an algorithm change some time in 2014 to give better visibility for Yelp’s search results. This is how searching for a business on Yelp via Google looked before and after the algorithm change.
Source: Search Engine Land
Source: Search Engine Land
Despite these changes, Yelp’s fortunes have not seen a significant turnaround. Unique visitors growth, which is the first problem the change would have addressed, grew just 13% during the quarter compared to 37% the year before. The company’s cumulative reviews, a good barometer of user engagement, grew 35% during the quarter compared to 47% in the prior year’s quarter. So these results poured cold water on Yelp’s claims regarding Google self-love. And, it’s not very likely that any future changes in Google’s ranking algorithms will benefit Yelp materially.
Yelp’s real problems
Maybe Yelp has been using Google as a red herring to deflect attention from a much deeper problem in Yelp's revenue model. Yelp makes money when businesses that have claimed their reviews buy ads on the site. People review all kinds of businesses listed on Yelp, which then invites these businesses to claim their reviews by responding to them. A business can then buy ads on Yelp once it has claimed its reviews. This is where the company faces an uphill battle. Out of the millions of businesses that have claimed their listings on Yelp, just 90,200, or less than 1% of listed business, bought Yelp ads during the first quarter. Though this represented a healthy 42% Y/Y growth, the chasm between claimed listings and number of active businesses on Yelp remains enormous. Moreover, the ARPALB, or Average Revenue Per Active Local Business, has remained flat for a number of quarters now. This is a sign of lack of interest in the business community using Yelp’s platform, or a simple case of not trusting the site’s reviews.
Shift to Programmatic Advertising
Yelp is one of the major ad companies that complained about how the rapid shift to programmatic advertising has been hurting its bottom line. Marketers are increasingly opting for programmatic ads instead of traditional display ads due to their lower CPM rates and higher ROI. eMarketer projects that programmatic ad spending will outpace spending on display ads for the first time this year and will reach 63% of total display ad spend by 2017. There is little that companies like Yelp can do to slowdown this shift so you can expect some pressure on the company’s bottom line.
Yelp issued weak guidance during the last quarter, and this is never a good sign. As things currently stand, it’s hard to see where any positive catalysts are going to come from to propel Yelp Stock higher. Yelp stock has received a significant boost in the past on merger speculations. But with no merger possibility floating on the horizon, the shares only hope for advancing would be if the company’s organic growth becomes more favorable. Yelp shares look fairly valued right now after the huge selloff, but it would make little sense buying them at this point.
Note: You might also be interested in Yelp Stock Analysis video.