Yelp (YELP, Financial) has performed brilliantly since February of 2016. The stock has almost tripled since hitting 52-week lows. While it recently looked like Yelp’s rally had lost pace, the company delivered terrific results that pushed the stock higher.
Yelp reported earnings per share of 22 cents, beating estimates by four cents. On the revenue front, Yelp is still witnessing strong growth as its sales jumped almost 30% on a year over year basis. Yelp’s revenue came in at $186 million, beating the consensus by $3 million.
Yelp has shot up almost 20% since releasing the results. However, I think the rally will prove to be short-lived and investors would be better off betting against Yelp at this point in time. While I do believe Yelp was a good buy a few months ago, I think the stock is a definite short right now.
Growth will slow down
Yelp has been growing at a rapid pace but the growth will come down significantly in the future. The company has already decided to slash its workforce by 4%. Sacking employees usually point towards a future of slower growth.
In addition to slashing its workforce, Yelp has even decided to stop its global expansion program. Yelp bulls have often hyped the company’s ability to expand its business internationally. However, Yelp’s U-turn on its global expansion plan probably means the company has not been successful in its international ventures.
This does not come as a surprise to me given the increasing competition in Yelp’s business. Going forward, Yelp’s growth is expected to come down rapidly and I do not think investors should really pay such a premium if its growth is not going to be as strong.
Yelp currently commands a market cap of almost $3 billion and there is no way the company can justify it if growth slows down in the coming quarters.
Conclusion
Yelp needs to triple its net income in the years to come to command a comparatively conservative price-earnings ratio. However, as mentioned above, I think Yelp’s growth is about to slow down significantly going forward. Hence, the chances of Yelp growing into its current valuation are really slim. Although the company has rallied strongly on the back of stellar results, I think investors should use the rally to exit the stock. Investors can even consider shorting Yelp, as I think the stock will perform terribly in the long run from here on out.
Disclosure: No position.
Start a free 7-day trial of Premium Membership to GuruFocus.
