Yelp Stock: This Should Terrify Yelp Inc. (NYSE:YELP) Shareholders

Yelp StockIf You Own Yelp Stock, You Need to Read This

Yelp Inc. (NYSE:YELP), the company that claims to “connect consumers with great local businesses,” said it would release its third-quarter financial results after the markets close on October 28, 2015. Based on the second quarter, the news will not be good for Yelp stock. The company was born in 2004 and its users can praise or criticize shops, restaurants, and all kinds of services on the web site, which boasts 142 million visitors per month drawn to over 77 million posted reviews.

“This year hasn’t gone as smoothly as anticipated,” said Yelp founder and CEO Jeremy Stoppelman during an analyst call, masking the poor showing of the second quarter of 2015 last July.

In Q2, Yelp saw 51% higher revenue but fell short of analysts’ expectations. If there’s one thing analysts do, it’s to have expectations while experiencing negligible sales growth. The stock tumbled from $33.50 to $25.06 between July 28 and July 29, never to recover. At the time of writing, Yelp’s stock was trading at around $22.00, unable to review its way back into the hearts of investors and analysts.

This Should Terrify Yelp Stockholders

Apart from the souring financial performance, Yelp stock is under pressure after the company gained the reputation as a bully. Many establishments claim Yelp hides favorable reviews when they refuse to buy advertising packages, posting only negative ones. Some of these, according to the claims, are of dubious origin and veracity.

On October 14th, South Park, one of the most effective tools for social criticism, devoted an entire episode to mocking Yelp reviewers, or “Yelpers,” spoofing their questionable qualifications and selfish motivations. (Source: Khusbu Shah, “South Park to skewer restaurant Yelpers on upcoming episode,” The Eater, Oct. 12, 2015). The episode reflects many of the actual real-life frustrations of many a restaurateur, claiming to have unfairly lost business because of an unfair Yelp review.

The market has recognized the growing importance of the reviews in driving tourism, including restaurant visits, and nobody doubts their influence. When users read a favorable or unfavorable opinion on a hotel or a restaurant on Yelp or one of its competitors such as TripAdvisor Inc. (NASDAQ:TRIP), they gain an undeniable level of confidence.

South Park Satirical View of Yelp Raises a Valuable Point  

While the South Park “Yelpers” episode lampoons the web site’s reviewers and value to great comedic effect, it raises a valuable question: how do the readers know whether a review written on TripAdvisor or Yelp reflects an authentic experience or a false opinion written by an employee, competitor, or malicious bullying customer?

These are some of the problems that the company has failed to address, which explains the recent weakness in Yelp stock. As part of the “sharing economy,” which is certainly influencing and changing consumer habits all over the world, it must take steps to ensure the interests of establishments and readers are in good faith. If South Park has targeted Yelp, it is because there have been abundant denunciation of its practices, including a documentary. (Source: Paul Bond, Yelp accused of mob-like behavior in upcoming documentary, The Hollywood Reporter, August 12, 2015.)

Yelp stock has considerable upside, but it cannot ignore the spoofs and criticism, addressing the allegations fairly and transparently if it is to take advantage of its potential. Indeed, in a report issued last September, the investment bank Credit Suisse published a report, outlining some of the sharing economy companies with the potential for fastest growth.

Analysts surveyed sectors, sub-sectors and firms that are highly exposed to the concept of sharing and those who may have only a partial relationship to the phenomenon. As for the hotel sector, there may be positive effects on HomeAway and TripAdvisor that according to analysts could expand its offerings to sharing accommodation. As for Yelp, the analysts said that it could benefit from the fact that companies of the sharing economy are using social media to develop and expand its offerings.

Some governments have taken notice of Yelp’s potential fairness issues. In 2012 and 2013, the State of New York prosecuted several agencies that were writing false Yelp reviews. (Source: “New York Attorney General Uses Fake Yogurt Shop to Crack Down on Fake Online Reviews,” Adweek, Sept. 24, 2013.) Even when offenders are caught, there is always the suspicion that some positive reviews on Yelp are highlighted when the establishment pays for advertising.

Faced with this situation, some institutions like Botto Bistro, an Italian restaurant in Richmond, California, exasperated by Yelp’s influence and frustrated by the fact that several positive ratings were never published, decided to launch an anti-Yelp campaign. (Source: Botto Bistro Rewards, Botto Bistro, last accessed October 16, 2015.) They encouraged their customers to write negative comments en masse.

For the record, Yelp has consistently denied allegations of deliberate unfairness and wrongdoing on its web site in court. It has recently received a federal appeals court to take a lawsuit alleging extortion.

Last month, the 9th U.S. Circuit Court of Appeals threw a complaint filed by several companies claiming Yelp extorted them by removing positive feedback after advertising sales locations were rejected. The court said it found no evidence of manipulation and he reigned narrower than on the issue of extortion. However, critics of the company said the decision supported their claims of unfair practices.

Then there are examples of Yelp’s potential. Wired magazine noted that Yelp even offers reviews of U.S. prisons—and not as ironic vehicles for less-than-satisfactory hotel stays.

Here’s the Bottom Line on Yelp Stock

Yelp attracts millions of viewers and sells advertising to 80,000 businesses. Nevertheless, its credibility could suffer if it does not address the insinuations of abuse coming from popular culture and some establishments. Yelp cannot ignore popular culture, which can fuel negative opinions to the point that those using the service start to suffer in a potential backlash. I would watch Yelp stock from the sidelines until these issues are cleared.

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