Shareholders of Yelp would probably like to forget the past six months even happened. The stock dropped 24.6% and now trades at $23.00. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Yelp, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Yelp Not Exciting?
Despite the more favorable entry price, we’re cautious about Yelp. Here are three reasons why there are better opportunities than YELP, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Yelp grew its sales at a tepid 6.1% compounded annual growth rate. This fell short of our benchmark for the consumer internet sector.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Yelp’s revenue to stall, a deceleration versus This projection doesn’t excite us and suggests its products and services will face some demand challenges.
3. Inefficient Marketing Strategy Eats Into Profits
Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Yelp grow from a combination of product virality, paid advertisement, and incentives.
It’s relatively expensive for Yelp to acquire new users as the company has spent 45.3% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that Yelp operates in a competitive market and must continue investing to maintain an acceptable growth trajectory. 
Final Judgment
Yelp isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 4.6× forward EV/EBITDA (or $23.00 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Yelp
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