Yelp’s (YELP, Financial) stock is down 18% since I last recommended selling the stock back in July. Although the stock has lost considerable value since then, the company has staged an impressive turnaround in the last few weeks. Yelp has jumped almost 25% in the last month. The stock jumped on news of InterActiveCorp’s offer to buy one of Yelp’s competitors — Angie’s List (ANGI, Financial). The firm offered to buy Angie’s List for roughly $512 million, marking a 10% premium over Angie’s value at the time.
Although Yelp’s recent recovery has been impressive, there has been no change in Yelp’s business model that justifies this rise. Yelp longs have bid up the stock in the hope of an acquisition. Investing on the hope of an acquisition is bad investing; it is highly unlikely as Yelp is still a terrible business. Here’s why.
No profitability in sight
Yelp has never reported a profitable year, and the company is still trading at a premium valuation. If you have read my previous articles, you know that I do not like stocks that have a bad track record when it comes to profitability. And while the likes of Westport Innovations (WPRT, Financial), SolarCity (SCTY, Financial) and Plug Power (PLUG, Financial) have retracted considerably, Yelp is still trading at a hefty premium. Yelp has a trailing P/E of 95, which is very expensive no matter how you look at it.
What’s worse is Yelp’s forward P/E is 1,403, signifying that analysts are expecting the company’s earnings to drop by a significant amount. No firm would pay a premium for a loss-making company that is already trading at a ridiculous valuation. Moreover, Yelp has no competitive advantage over its peers.
As I mentioned in my previous article, the competition in the sector is increasing. The likes of Twizoo and AroundMe pose massive threats for Yelp going forward. Both these rivals have a better business model than Yelp and have turned profitable already. It’s highly likely that one of these companies will be acquired before Yelp.
Conclusion
While Yelp’s recent rally is very impressive, the company’s business model is terrible. The chances of Yelp getting acquired are next to zero, and the lack of profitability is a big red flag. In spite of the losses, Yelp’s stock demands a very lofty premium. Yelp is a terrible investment, and investors should use the recent rally to short the stock.
