Yelp Down 25% After Earnings

Shares of YELP (NYSE: YELP) were down more than 25% last week after reporting Q1 revenue that missed analyst’s estimates, while also cutting full-year guidance. Some of the harshest criticism came from Mark Mahaney an analyst at RBC Capital Markets who downgraded the stock and cut his outlook from $49 a share to $27.

“We got this wrong. Flat out,” says Mahaney, in his report, humorously titled “Yelp – We Need Somebody…” The main issue at play for Mahaney and others is the advertiser churn going on at Yelp. With advertisers simply walking away and reinvesting their money in sites like Facebook. Mahaney writes:

In Q4 Yelp missed expectations due to salesforce productivity issues... salesforce productivity (in terms of new account adds) is now back to normal. The new issue? Client retention: In Q1:16, YELP brought on a broader set of advertisers as it made the change from a CPM to CPC advertising model. In Q1:17, Yelp experienced a higher rate of revenue churn than they had expected among these clients. The direct point is that these advertisers didn’t find the ROI they wanted on the Yelp platform, and so they churned. Which leads to Revenue deceleration & increased costs/lower Margins.

Revenue churn appears to be a big issue for Yelp, something not the least bit surprising to those of us in the hospitality space. Yelp’s business model, with their customer-centric philosophy directly puts restaurants in harms way. The platform enables a customer to write at best – an incredibly subjective review, and at the worst a false and inaccurate detail of a business’ operations. What’s worse, by Yelp’s own admission, 30 – 40% of all the feedback on their site is false! That’s a fair amount for a platform that is swift to punish a business if they feel they are attempting to impact the rules of this system.

Yelp is then turning back to these very same businesses and asking them to pay for preferred placement in search. Ultimately this business model seems to be one that is in many ways cannibalizing itself -- trying to get revenue from the very same businesses they have put under siege.

Alexander Pavone