Yelp Plunges on Bad Reviews From Analysts: What Wall Street's Saying

Updated from 9:04 a.m. with Wednesday stock prices.

NEW YORK (TheStreet) -- Yelp's (YELP) dropping profits and worrying changes to the company's advertising strategy led to bad reviews from analysts Wednesday.

For the second quarter, the San Francisco-based online review service reported a loss of $1.3 million, or an adjusted 12 cents per share, on revenue of $133.9 million. Although revenue increased by 51% over the same quarter last year, analysts were expecting the jump with their consensus revenue predictions of $133.48 million, according to figures from Thomson Reuters. The projection for earnings was 1 cent a share.

For the same quarter in 2014, the company reported a net income of $2.7 million and an adjusted EPS of 12 cents.

Yelp also cut sales projections for the full year to a range of $544 million to $550 million, down from a previous outlook of $574 million to $579 million.

Shares of the company were down 28.2% in morning trading Wednesday to $24.05, a new 52-week low. Over the past year, shares have fallen more than 65%, compared to a 6.8% gain in the S&P 500 (SPY).

Although some analysts pointed to the company's financials as the biggest disappointment, many were also taken aback by Yelp's decision to eliminate display advertising and focus instead of local and native ads. 

The company also noted its chairman, Max Levchin, who helped start PayPal (PYPL), would be leaving the company as well.

Getting rid of display ads, which represented 6% of the company's revenue in the second quarter, would create a "near-term impact on revenue and adjusted EBITDA, we believe this is the right decision for the long-term success of the company," Yelp founder and CEO Jeremy Stoppelman said in a conference call Tuesday.

Still, many analysts were not enthused by the decision. Here's what a few had to say.

Pacific Crest Securities analyst Evan Wilson (sector weight, no price target)

"Yelp's biggest disappointment was its EBITDA margins. In Q2, Yelp revised expectations of a 40% increase in sales headcount to 30%, which accounted for two-thirds of the revenue guide down. The other one-third of the revised outlook is due to the phasing out of its brand advertising (display advertising) product to improve  user experience.

"While Yelp stopped disclosing its total unique visitors for the first time, it did disclose that desktop users declined and growth is slowing significantly on mobile. As we've seen across the space, this is a recipe for margin disappointment as companies, especially advertising/audience companies, ramp spending on new products and advertising."

Barclays analyst Christopher D. Merwin (equal weight, $30 price target)

"Yelp plans to spend the majority of its budgeted $30M in marketing dollars in the back half of the year, and while that may offer a temporary reprieve in traffic growth, we think longer-term challenges remain, in particular heavy competition in the local Internet space. As a horizontal local player, we believe Yelp has to contend with competition from both public companies and well-funded VC start-ups in certain key verticals -- competitors that devote all of their resources toward a single vertical."

Cantor Fitzgerald analyst Youssef Squali (buy, $50 price target)

"The local online ad opportunity remains substantial and the number of players with scale, brand and network effect is limited, in our view, positioning Yelp as a prime beneficiary both as an operator and an acquisition target. Yelp reported mixed 2Q results that were largely in line with expectations on revenue but below on EPS. Management's decision to phase out brand advertising and the slower growth in salesforce hiring have led to a lower 2015 outlook."

Jefferies analyst Brian Fitzgerald (buy, $42 price target)

"Yelp is exiting its high-margin Brand business by the end of the year. Increasingly disruptive display ad formats are a hindrance to Yelp's app experience and so [management] decided to stop displaying them. Brand is an almost 100% margin business and therefore the impact to profitability is very significant. In fact, $10M of the $30M hit to the Rev/Adj. EBITDA outlook for the back half of the year will come from turning off brand inventory.

"Yelp has not been able to hire salespeople at the planned rate. ~$20M of the reduction to the FY15 Rev outlook is related to Yelp's inability to increase sales headcount at the rate it targeted (due to the hot labor market in the SF Bay Area), a problem not unique to Yelp. The company recently opened a calling center in Chicago, and hopes this will help alleviate some of its constraints."


TheStreet Ratings team rates YELP INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate YELP INC (YELP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and compelling growth in net income. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • YELP's very impressive revenue growth greatly exceeded the industry average of 5.4%. Since the same quarter one year prior, revenues leaped by 55.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • YELP has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 7.81, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for YELP INC is currently very high, coming in at 92.58%. Regardless of YELP's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, YELP's net profit margin of -1.08% significantly underperformed when compared to the industry average.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Internet Software & Services industry and the overall market, YELP INC's return on equity is below that of both the industry average and the S&P 500.
  • YELP's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 49.00%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry.

You can view the full analysis from the report here: YELP Ratings Report

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