Long-term doubt emerges over yelp

Investors really don’t like Yelp Inc.’ s first-quarter results.

The stock plunged after the online business review platform’s revenue came in below analysts’ estimates and at the low end of guidance for the first time in its history.

Yelp pointed to a temporary salesforce issue to explain the weak results in its local advertising segment, but its second- quarter guidance suggests this issue may persist.

The stock had been rallying in the past couple of months, so the magnitude of Thursday’s pullback wasn’t unexpected.

RBC Capital Markets analyst Mark Mahaney, who admits he got it wrong by upgrading Yelp almost a year ago when it fell to US$58 a share on a major pullback, moved in the other direction on Thursday. He downgraded the stock to sector perform from outperform, and cut his price target to US$50 from US$82, as the most recent quarter is seen as a negative inflection point.

“We still view Yelp as a top- of-funnel, strong-brand unique asset with downstream transaction capability. But that transaction capability could take a long time to play out,” Mahaney said in a note to clients. Another concern is that two sources of potential growth have failed to surface. Yelp’s younger markets are generating much lower revenues than its older markets, and there is now significant deceleration in revenue growth for all of the company’s cohorts. Meanwhile, the company’s international markets have not yet broken out of the three-per-cent contribution range, and unique visitor numbers have flatlined.

Manahey believes the root cause is probably not competitive factors, although Google is an issue overseas.

The more likely culprit, he said, is the difficulty associated with sustaining highgrowth momentum given the company’s high-churn base of small and medium-sized businesses.