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If Everybody Hates Yelp, Why Is It Still Growing?


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Shares of Yelp (YELP) opened sharply lower on Thursday. The website that prides itself on user-submitted reviews of local establishments posted blowout quarterly results, but any good sentiment there was washed out by a weak outlook for the current quarter.

It was a strong third quarter. Revenue soared 67 percent over the prior year's third quarter to hit $102.5 million. Analysts were only holding out for $99 million. Yelp's adjusted profit of 5 cents a share was also comfortably ahead of expectations.

The pitfall in the report came from Yelp only targeting $107 million to $108 million in revenue for the holiday quarter. Top-line growth is decelerating. Most companies would kill for the 52 percent in year-over-year growth that Yelp is modeling, but Wall Street was forecasting 57 percent growth.

When you're a market darling trading at a lofty multiple -- and Yelp was fetching a whopping 175 times next year's projected profit -- a miss can be brutal. Sometimes 52 percent growth isn't enough.

Cry for Yelp

Wall Street wasn't impressed. Pacific Crest Securities, Barclays Capital, and JMP Securities all lowered their price targets on Yelp. Stifel Nicolaus downgraded the stock. You don't win friends among the Wall Street pros following you when you make them look like chumps. Where does Yelp go from here?

There's no denying that Yelp is succeeding in getting merchants to pay more for enhanced access to the site's growing user base. However, it has to be a little problematic to see revenue -- again, up 67 percent over the past year -- grow a lot faster than its user base. Yelp closed out the quarter with an average of 139 million unique monthly visitors, up just 19 percent over the past year. Users are contributing more reviews than they used to, but can the faster-growing base of active advertisers justify the marketing expenditures if the audience growth doesn't keep up?

Yelp may also have a problem with Google (GOOG). The world's largest search engine wants to be the top dog in local search, and an update earlier this year infuriated Yelp by pushing its listings lower in Google's organic search results. Yelp even accused Google of showing a venue's official site, Google+ page and Google reviews above Yelp pages on queries that included "Yelp" and the venue name.

Google remedied the situation in a summertime algorithm update, but it still shows how even an established leader like Yelp can be vulnerable. "Google obviously continues to make changes on their side both competitively and algorithmically, but fortunately we have incredible consumer content, and so one way or another people ultimately do find their way there," CEO Jeremy Stoppelman said during the conference call following Wednesday night's report.

Yelp's growth is proof that it's holding up just fine, but it's something that bears watching in a climate in which many consumers are starting to have doubts about the credibility of Yelp's reviews.

Taking Yelp to Task

A growing number of merchants have been accusing Yelp of shady business practices. The Federal Trade Commission has received more than 2,000 complaints from merchants accusing Yelp of doing things like requiring them to pay to suppress negative reviews or bump favorable mentions higher.

Yelp has denied the accusations. It could have been a few aggressive sales reps trying to bump up numbers by going off script to nail the sale. In some cases it could just be jealous merchants. That has attracted the attention of class action litigation specialists, but it hasn't deterred the site's growth.

Investors should still keep an eye on Yelp's reputation. There are scalable advantages to being the niche leader, but the tables could turn in a hurry if the criticism gets louder and users start looking elsewhere for similar reviews and information. Given Yelp's still-rich valuation, the inevitable face-off with Google and the complaints from select merchants, it may take some time before the stock revisits its all-time highs.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Google (A and C shares) and Yelp. The Motley Fool owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.


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