Yelp (YELP) reported two consecutive profitable quarters but not even that was enough to get Wall Street excited. Despite the profits, Yelp’s growth ramp is slowing down. So investors are dumping YELP stock, which is off by 15% to $59.34 in early trading. That’s down nearly 40% from March’s all-time highs.
Let’s take a closer look at the third quarter to see whether this is a long-term trend, or just a dip that investors should buy into.
Third-quarter revenues surged by 67% to $102.5 million, and net income came to $3.6 million or 5 cents per share. Income was up from a loss of $2.3 million or 4 cents per share in the same period a year ago. Analysts were looking for revenues of $99 million and earnings of 3 cents per share.
Yelp also showed solid traction with key user metrics. The average monthly unique visitor count jumped by 19% to 139 million. About 73 million came from mobile sources, up by about 46%.
The Yelp platform also saw robust engagement. In the quarter, cumulative reviews grew 41% year-over-year to 67 million. About 51% of these were from mobile sources.
Yelp Stock’s Strength Is in the Past
That’s all great … but investors are concerned about the outlook — which looks less-than-rosy for Yelp stock. The company’s forecast for Q4 revenues is $107 million to $108 million. Yet the Street consensus estimate was for $111 million.
It appears that foreign markets are getting tougher to monetize. After all, there are dominant companies, such as TripAdvisor (TRIP) and Priceline (PCLN), that have recently entered the restaurant review space. These operators obviously have tremendous brands, marketing resources (with lots of TV commercials) and tremendous leverage from their existing travel platforms.
There are already ominous signs that the competition is taking a toll. Consider that Yelp reported a flat quarter-over-quarter performance in international traffic.
At the same time, Yelp stock may be weighed down by increased competition in the U.S. market as well, such as Google (GOOG) and Priceline’s OpenTable. Oh, and Groupon (GRPN) recently jumped into the market, with its new feature called Pages, which has listings for 7 million businesses.
While GRPN has faded, the company still has an enormous footprint. There are 22.6 million active customers in North America, and more than half of them use mobile devices to access services.
In other words, the deceleration in revenue growth may be more than a temporary blip, which could mean that Yelp stock is vulnerable to continued weakness. Let’s face it, the valuation is still at stratospheric levels, with the forward price-to-earnings ratio of 150.
So even with the recent drop in Yelp stock, investors are still betting that growth will be standout. Yet this is far from certain, especially in light of the competitive threats and the difficulties in monetizing foreign markets.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
