Yelp (YELP, Financial) has staged an impressive rally as of late. The company’s better-than-expected quarterly report resulted in a 25% rally. However, I think investors should use the recent rally to get out of the stock as its long-term future is still in the dark.
Not at all profitable
The main factor that makes me bearish on Yelp is the company’s track record. Bearing in mind the collapse of the company’s financial situation, the recent rally should be used as an exit point.
Yelp is still losing money as evident by its recent quarterly result; it lost 44 cents in earnings per share. Many analysts believe this trend will carry on, and the company will lose money in the next quarter. A short look at the company’s income statement for the prior five years should be more than enough to put off stockholders from believing in the temporary sustainability of the company.
From the start, the company has never effectively rewarded stockholders. Apart from this, the sudden resignation of Chief Financial Officer Rob Krolik throws light on the company’s poor sustainability and inability to hold key staff in the middle of its charge on the way to a 2017 topline mark of $1 billion.
As a matter of fact, top line declined 45% in the previous year while the cost of assets sold surged by approximately 90% year over year, a drift that is not bearable if the company ever hopes to move onward and convey any kind of stockholder value.
Expenditures growth beats revenue growth
One of the substantial reasons why Yelp’s top-line growth is poorer than it appears is because the company has to pay considerably for it. In 2015, the company reported it was having problems regarding its sales force mainly due to strong competition for skilled sales people.
Yelp shared that it will continue investing in its sales force to gain growth prospects moving onward. Sales and marketing expenditures ascended around 63% to $87.5 million in the previous quarter, which comprises $5.8 million of stock-based compensation. That outlay growth is much greater than top-line growth.
Conclusion
Yelp’s top-line growth has been impressive in the past, but the company’s profitability is still a massive concern. Investors should exit the stock after the recent rally; it does not hold a good risk/reward ratio now and will probably head lower.
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