Yelp Inc (YELP): Local Service Provider Continues to Struggle

Yelp Inc (NYSE:YELP) recently disclosed the financial information for its fourth quarter in 2012, and the company’s outlook does not seem bright. The online review business exhibited stronger financial performance when compared to the same quarter last year; however, the company is still far from reaching break even, as the losses continued in the fourth quarter. Yelp announced a loss of $5.6 million for the fourth quarter, which was lower than the loss of $9.1 million in the same quarter last year. However, when the financial information of the whole year is taken into consideration, Yelp lost more in 2012 when compared to 2011. For 2012 the loss was $19.1 million, which was higher than last year’s loss of $16.9 million.

Yelp exhibited a significant rise in revenue in the fourth quarter, increasing by 65% to $41.2 million from $24.9 million in the same quarter last year. The revenue of the company also grew in terms of the annual financial information. For 2012 revenue was $137.6 million, which is significantly higher than the revenue of $83.3 million in 2011. According to the CEO of Yelp, Jeremy Stoppelman, 2012 has been a “tremendous year for Yelp;” however, the analysts and the investors may find it hard to agree with the company’s CEO. The market performance of the company has been excessively volatile recently, and this market behavior can be directly attributed to the company’s weak financial performance. The following chart represents the financial performance of Yelp over the past few quarters.

It can be observed from the chart that the growth in the company’s revenue has followed a very stable and predictable pattern; however, the profit margin of the company has been volatile. Although the financial performance of the company in Q4 2012 is significantly better than Q4 2011 in terms of both revenue and profit margin, the decline in profit margin when compared to Q3 raises questions regarding the prospective growth in the profit margin of the company.

Yelp’s financial performance is also weak in comparison with its competitors. One of the major competitors of the company is Yahoo! Inc. (NASDAQ:YHOO), which operates a similar service called Yahoo! Local. Since Yahoo! holds a diversified business portfolio, its financial performance is significantly stronger than that of Yelp. Yahoo! holds an EPS of 3.28 against Yelp’s EPS of -0.35. Although Yelp’s service has more features as compared to Yahoo!, the strong position held by Yahoo! helps it attract a large number of visitors and therefore generate higher profits. Indicative of this, the net profit margin of Yahoo! for Q4 of 2012 was 9.27%. With new CEO Marissa Mayer, Yahoo! is undergoing some structural changes, and these changes have had a very positive impact on its market performance. The improving position of Yahoo! has made it difficult for Yelp to compete.