Competitors
Apart from still losing money and having poor fundamentals in comparison with its current market valuation, Yelp has to deal with one more issue: low barriers to entry. It isn’t hard to come up with yet another local review app. In this way, Yelp is constantly exposed to competition coming from start-ups, some of which may become early stars in the segment.
But Yelp also needs to pay attention to some giants, including Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG). Both companies are interested in the local reviews segment and have the resources to bring traffic almost immediately to their new apps.
Facebook Inc (NASDAQ:FB)’s Local Search is a great competitor: according to a recent comScore-15 Miles-Neustar local search study, it’s already one of the most used mobile apps for local search. With more than a billion users under its network, Facebook Inc (NASDAQ:FB) can create demand for reviews almost immediately. Yelp investors are aware of this, and that’s why when Facebook released its feature, Yelp’s stock price decreased almost 4% in less than 20 minutes back in December 2012. The stronger Facebook’s Local Search gets, the more probable it is to see negative momentum on Yelp’s stock. And since mobile isn’t growing as fast for Yelp as it is growing for Facebook Inc (NASDAQ:FB), I wouldn’t be surprised to see more growth in Facebook Inc (NASDAQ:FB)‘s Local Search at the expense of Yelp’s user base contraction in the near future.
Google Inc (NASDAQ:GOOG), on the other hand, has Google Maps, which is also a direct (yet strong) competitor: according to TechCrunch, “Google borrowed liberally from Yelp’s database of reviews to flesh out its Google Places pages.”
But Google Inc (NASDAQ:GOOG) also owns Zagat. Founded by Tim and Nina Zagat 32 years ago, Zagat operates in 13 categories (from theaters to restaurants) and more than 100 cities. And although Zagat may still be small in comparison with Yelp, the giant can promote it quite easily using Google Maps, if necessary. Even better, Zagat reviews can become an integrated application to Google Glass. This could help Google gain more market share in the local reviews segment. Remember that Google Inc (NASDAQ:GOOG) once tried to buy Yelp (in late 2009), without success. The giant is interested in this segment and that’s enough to watch correlations between Yelp and Google Inc (NASDAQ:GOOG)’s stock closely.
My investment thesis
To me, Yelp Inc (NYSE:YELP)’s fundamentals dictate a value well below the current market price, at least for now. It’s an expensive local review app, operating in a segment with low barriers to entry.
Two of the biggest IT giants are interested in stealing market share and that will make things even tougher for Yelp. Facebook Inc (NASDAQ:FB)’s Local Search enjoys the advantage of being owned by the biggest social network in the world, with its mobile exposure growing faster than Yelp. Google Inc (NASDAQ:GOOG), on the other hand, owns Google Maps and Zagat. In this context, I see little reasons to consider Yelp as a sound, long-term investment.
The article Is This Unprofitable IT Stock a Disaster in the Making? originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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