When a fast growing company experiences a slow-down in one quarter, it could be an aberration. But when the slow-down lasts two quarters or more, it could be sign of something more serious -- like a weakness in its business model.
That seems to be the case with
Last quarter the company reported a slow down in monthly unique visitor growth, from 39% a year earlier down to 13%, while total unique visitors fell for the first time on a quarter-over-quarter basis. Now, the operator of a consumer review web platform reported a 3% decline in the average monthly desktop unique visitors, while its revenue of $118.5 million in the last quarter missed analysts’ expectations.
And things might get worse going forward, according to the company’s guidance.
That’s why Yelp's stock dropped sharply (-22%) on Wall Street, following the release of the company’s financial report. This follows a 19.47% drop in the company’s stock back in January, following its Q4 financial report.
Yelp’s Financials as of 4/28/2015
Forward PE |
Qtrly Revenue Growth (yoy) |
Qtrly Earnings Growth (yoy) |
Operating Margin |
Revenue |
70.95 |
55.50% |
– |
03.0% |
$377.54M |
Source: Finace.yahoo.com
Yelp’s Financials as of 2/6/2015
Forward PE |
Qtrly Revenue Growth (yoy) |
Qtrly Earnings Growth (yoy) |
Operating Margin |
Revenue |
53.04 |
67.50% |
-- |
0.40% |
$338.30M |
Source: Finace.yahoo.com
What’s the weakness in Yelp’s model?
The way the company monetizes its platform—in particular, reliance on companies that are graded rather than on consumers for its revenues.
That raises serious questions about the credibility of its reviews, as evidenced by complaints against the company filed with the San Francisco Better Business Bureau.
“Complaints concern, among other things, business owners who are concerned that their positive reviews are being filtered and negative reviews are remaining, potentially giving consumers a skewed view of their business. Some complaints also concern business owners alleging that there are false or inaccurate reviews on their Yelp listing that Yelp will not remove, though the business owner has provided proof or substantiation that the review is false or inaccurate.”
While these are just allegations, it could make some potential visitors of Yelp.com skeptical, in our opinion.
Then there are a couple of headwinds that add to the company’s woes. First, a number of less technology savvy consumers at home and overseas, who are less comfortable using Yelp.com than the technology savvy consumer.
Second, competition from upstarts like OpenLabel, which builds on Yelp’s model, creating “consumer bar codes” for every product. These codes include broad information on company and product brands -- like certifications, carbon footprint, political donations, worker treatment, health issues, safety records, animal welfare.
The bottom line: Yelp needs to take a close look at its business model, perhaps taking a lesson or two from credit rating agencies.
