The growth story of Yelp (NYSE:YELP), an online urban city guide which helps people locate restaurants, has been impressive. The stock has appreciated nearly 310% in the last 12 months and is still the leading listing service for restaurant reviews. Yelp has grown its revenue consistently, but earnings have come to a standstill. The company posted a wider than expected loss (yet again) in the latest reported quarter, but investors have neglected that and have continued to bid up the stock due to its impressive revenue growth. However, I think Yelp's bull run is about to come to an end, which is why I think investors should short the stock. Let's take a look at the reasons why I think Yelp will plummet in the future.
Google Will Dethrone Yelp
Yelp has been spending lavishly in order to lure advertisers. Surging marketing expense has resulted in consistent double-digit revenue growth, but it is the primary reason why the company has never posted a profit. This strategy may backfire as the market is becoming increasingly crowded and Yelp will quite probably surrender market share to big name players like Google (NASDAQ:GOOG).
There are numerous reasons why I think Google+ Reviews can easily push Yelp aside and become the market leader. Let's go over the reasons one by one.
The first reason is promotion by integration. Google is trying to make its search service a one-stop shop for users and has integrated Google+ Reviews across local Google searches and Google Maps, giving it a competitive edge over Yelp. Eighty-three percent of searches were embedded with Google+ Reviews, which ultimately promoted the app in front of millions of users.
The second reason why Google+ Reviews will cruise ahead of Yelp is customer satisfaction. New reports suggest that one out of every five review on Yelp is fake, which makes it difficult for the users to trust the assessment. Surpassing Yelp's review filter is pretty easy. Basically, if you set up multiple accounts and use them regularly, Yelp's review filter will not be able to know that the accounts are phony. Google, on the other hand, can do a much better job in tracking fake accounts. Google can track activities on other apps like Google Maps, Gmail, etc., which the majority of the people use, to differentiate real accounts from the ones which are counterfeit.
In addition, Google has made it possible for users to get the menu of their preferred restaurants with a quick search. Users will be able to get the menu, price and availability by typing or speaking "show me the menu at [restaurant]" from any of Google's search products. This spells trouble for Yelp, as users would find it easier to type in a search query than launching an app. As of now, this feature is only being rolled out in the U.S., and if Google is able to provide suitable answers to common restaurant queries, it will make visiting Yelp less necessary, if not unnecessary. All these factors together will result in a migration of users from Yelp to Google+ Reviews, thus hurting the former's future revenue and earnings.
A short interest of over 21% indicates that a considerable proportion of investors have realized the fact that Yelp will struggle in the future. Yelp will not be returning to profitability in fiscal year 2014, and the company's stock price is too high to validate its present value. In addition, the company's growth is slowing down, and to make matters worse, it risks losing market share to Google at some point. With all these challenges ahead, Yelp is still hovering near its all-time high. Thus, it's highly likely that Yelp's shares will drop once it falls prey to Google, making it a good short candidate.