Yelp Plunges on Sell-off, Faces Probe - Analyst Blog
May 07 2014 - 1:56PM
Zacks
Shares of Yelp Inc. (YELP) plunged 13.4%
($8.06) to $52.13 following a broad sell-off of Internet-based
stocks. Moreover, shareholder rights law firm, Johnson &
Weaver, LLP, announced an investigation against the company.
The law firm will investigate potential violations of the federal
securities laws, which include Yelp’s business practices. The
investigation also focuses on the true nature of the reviews that
appear on the company’s website.
Of late, Yelp’s business practices regarding reviews appearing on
its website have faced significant criticism. In early April, the
Federal Trade Commission (FTC) said that it received an
overwhelming number of complaints about the company’s business
review practices over the last five years.
The FTC announced that it received more than 2,046 complaints
against Yelp. According to The Wall Street Journal, most
of the complaints were lodged by small business owners alleging
that Yelp posts fraudulent reviews that defame their
reputation.
Most of these business owners stated that the negative reviews
posted on the website appeared after they declined to pay Yelp for
sponsorship. Some of them sued the anonymous reviewers and asked
Yelp to reveal their true identities.
Yelp also said that it receives approximately six subpoenas on a
monthly basis, demanding the true identities of the anonymous
reviewers. The company vehemently denied the allegations as well as
any relationship between reviews and sponsorship.
The company argued that the reviews from websites such as Yelp,
Amazon.com (AMZN), Google
(GOOGL), Yahoo! (YHOO) are protected under the
federal Communications Decency 1996 Act, from being sued for the
content they publish.
However, we believe that any negative finding will not only hurt
the company’s reputation but also attract other lawsuits increasing
Yelp’s legal expenses, negatively affecting profitability.
In the recently concluded first quarter, Yelp incurred a loss of 4
cents per share, narrower than the Zacks Consensus Estimate of a
loss of 6 cents. Revenues for the quarter, however, surged 65.6%
from the year-ago quarter to $76.4 million.
Strong growth in user base (particularly mobile), its entry into
new markets (both domestic & international) and new
partnerships are the positives for Yelp. However, as Yelp continues
to explore and expand into new markets, sales & marketing
expenditure is expected to increase significantly, thereby hurting
margins.
Moreover, fierce competition from the likes of
Facebook (FB) in the brand related revenue market
remains a major headwind, going forward.
Currently, Yelp has a Zacks Rank #3 (Hold).
AMAZON.COM INC (AMZN): Free Stock Analysis Report
FACEBOOK INC-A (FB): Free Stock Analysis Report
YELP INC (YELP): Free Stock Analysis Report
YAHOO! INC (YHOO): Free Stock Analysis Report
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