- Yelp shares have rallied strongly ever since IAC made a buyout bid for Yelp's key rival, Angie's List.
- Angie's List management has, however, turned down the IAC offer saying the company will soon be worth a lot more since its turnaround is beginning to bear fruit.
- Should investors buy Yelp shares on speculations that the company might soon find a willing buyer?
Yelp (NYSE:YELP) shares have topped the psychological $30 mark for the first time in five months on nearly double the normal trading volume without any major news crossing the wires. Yelp shares have rallied 24% ever since IACI (NASDAQ:IACI) launched an unsolicited $8.75 all-cash buyout bid for fellow business listing and review site Angie's List (NASDAQ:ANGI). The offer price represented a 10% premium to Angie’s List closing price on the day the offer was made. Angie’s shares are up nearly 50% since the buyout bid hit news feeds, and are now trading 25% above the offer price. Angie’s List shares are up a solid 74.8% YTD while Yelp shares are still down 45% YTD despite the recent healthy gains.
Angie’s List has turned down IAC’s bid saying its turnaround bid is just getting underway, and the company would be worth much more than that in due course. Apart from being two popular business review sites, Angie’s List and Yelp share something else that’s not so benign--both companies have remained deeply in the red, which probably points to a flawed business model. Angie’s List has never been profitable in the 17 odd years it has been operating as a public company. Meanwhile, Yelp is rarely GAAP profitable--the only time the company has ever reported a GAAP profit was in the June quarter of 2014. Both companies’ bottom lines are plagued by extremely high marketing expenses--Yelp spent 58% of its revenue and 54% of its operating expenses on sales and marketing functions. Angie’s List’s problem is exacerbated by its paid membership model which has been limiting its growth.
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But despite its loss-making history, several companies have in the past expressed their interest in buying out Yelp. Alphabet Inc-C (NASDAQ:GOOG) offered to buy Yelp for $550 million back in 2010, which Yelp turned down because Microsoft (NASDAQ:MSFT) offered a counterbid of more than $700 million for the company. Yelp, however, later turned down Microsoft’s offer as well after it received a fresh round of VC funding. Take note that back then Yelp was still a private company.
Other companies that have been mentioned as possible merger candidates with Yelp include Priceline (NASDAQ:PCLN), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), TripAdvisor (NASDAQ:TRIP), and Yahoo (NASDAQ:YHOO), though none has explicitly made a takeover move.
Yelp seems to be deeply divided on whether it should sell itself or not. There were widespread speculations earlier in the year that Yelp was scouting for a buyer, only for the company to later dismiss Goldman Sachs with CEO Stoppelman saying he would avoid selling for as long as he could.
With Yelp shares hammered so badly this year, there is little doubt that companies that would like to buy it view this as a good time to pounce now that Yelp is on the ropes and bleeding seriously.
But Yelp might not be so willing to sell now especially after the company recently topped both top and bottom line estimates. Yelp reported Q3 2015 revenue of $143.2 million, 40.2% higher than last year’s comparable quarter, and non-GAAP EPS of $0.03. Revenue beat estimates by $2.18 million while EPS was $0.12 better than consensus estimate. Yelp attributed its healthy results to strong growth in ad revenue, its core revenue segment. Despite the good results, Yelp shares were up only 2% or so, a clear indication that investors are yet to buy into its turnaround narrative.
Yelp is yet to fully reassure the investing world that it can successfully monetize the gazillions of users on its platform. Although Yelp has more than 76 million businesses listed on its site, only 2 million or so have claimed their listings and a paltry 90,000 advertise actively on the platform. Moreover, despite spending tons of money on sales and marketing functions in a bid to expand to international markets, Yelp’s international monetization remains very anemic compared to its North American market.
The two times Yelp shares have rallied strongly this year have both been purely on merger speculations, partly due to a high short interest in Yelp shares and partly due to the fact that investors remain very skeptical about the company’s long-term prospects. Yelp would probably be better off as a subsidiary for a bigger company since its sky-high marketing costs would be folded into those of the bigger business. The company’s prospects as a standalone concern, however, remain rather bleak. Since Yelp is unwilling to sell (maybe until an activist investors steps in and applies some pressure on the company’s management) I would only advise investors with a high tolerance for risk to buy Yelp shares, otherwise just keep off.