Will Yelp Inc (YELP)’s Business Model Get it in Trouble?

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Yelp is Expensive Anyways

Even without the legal issues going on, Yelp is overvalued and there is no justification to its $2-billion market value. Last year, Yelp generated $137 million in revenues and a loss of $19 million. Yelp Inc (NYSE:YELP) hasn’t posted a profit in years, and its margins are still in the negative zone. Also, keep in mind that the company continues to issue more shares in order to pay its employees. In 2011, the company had 59 million shares outstanding–today it has 63 million shares. This is not sustainable at all.

Google is a huge threat to Yelp

Besides, Google Inc (NASDAQ:GOOG) is moving towards the local advertisement market, and it has the capability to end Yelp’s growth once and for all. Currently, users can search a local business and review it using Google Maps, and as more people notice this it is likely to hurt Yelp’s business model. Google Inc (NASDAQ:GOOG) has a tendency to dominate everywhere it goes, and the company enjoys a huge footprint across the world. Google might not be the only company that is entering in this market either. Apple Inc. (NASDAQ:AAPL) has been investing a lot of money and acquiring a large number of mapping-related businesses, and it may launch its own Yelp-like service soon. Up until now, Yelp had almost no competition and it couldn’t capitalize this, now that it will have serious competition, things will get even tougher for the company.

Google and Apple may be better bets

I am sure Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) will do a much better job of monetizing local business reviews without making it look like a mafia business. Besides, both companies have much, much better valuations than Yelp Inc (NYSE:YELP) could even dream of. Google trades for 24 times future earnings, and Apple Inc. (NASDAQ:AAPL) trades for 7 times future earnings (excluding cash). Growth might have slowed down for these two companies but at least they are making money. With few exceptions here and there, investors are much better off by putting their money into companies that actually earn money. Yelp reminds me of companies in the dot.com bubble of 1999.

The article Will Yelp’s Business Model Get it in Trouble? originally appeared on Fool.com and is written by Jacob Steinberg.

Jacob Steinberg owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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