YELP Yelp Inc

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).

 
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