Business

Yelp Inc. (NYSE:YELP) Under Pressure From Activist Investors After Disappointing Q3

Yelp Inc. (NYSE:YELP) has bottomed out after plunging on reporting disappointing quarterly growth and reduced full-year guidance. The company reported disappointing third-quarter sales that spooked the market triggering a 30% plunge.

Yelp Price Analysis

In addition to disappointing financial results, management squabbles also appear to have dealt the stock’s sentiments a big blow. Top five shareholders in the local search and customer review company are increasingly pushing for board changes and the appointment of new independent directors. The string of negative development has all but continued to fuel a sell-off of the stock. After the recent plunge, the stock looks set to continue trading in a range into the year-end. However, the stock appears to have found support at the $30 a share level from where it is trying to make a comeback to the top.

Source

Initial indication is that the stock remains well supported at the $30 to $48 a share range in which it looks set to trade, heading into 2019. A breach of the $30 a share level could see the stock edge lower in continuation of the recent bear run

Why is Yelp under Pressure?

Disappointing Q3 Results

Yelp remains under pressure on reporting Q3 financial result that fell short of consensus estimates. Even though revenues were up 8% to $223 million, it still fell short of guidance that called for a range of between $242 million and $246 million. Fewer new customer additions and slow growth in local advertising revenue are some of the latest headwinds clobbering Yelp sentiments among investors. The ongoing transition to non-term advertising, poised to accelerate customer acquisition, is also having an impact on the company’s bottom line in the short term. “While the shift to non-term advertising has opened our sales funnel, it has also made our results more sensitive to short-term operational issues. We have begun to address a number of the issues,” said CEO Jeremy Stoppelman. The earnings report also indicated a slowdown in new account growth in the third quarter compared to the first half of the year. Yelp also suffered from reduced sale force productivity.

Management Squabbles

Disappointing earnings result is not the only trigger behind Yelp’s recent underperformance in the market. Part of the stock’s underperformance also has to do with ongoing pressure from large investors. SQN, which holds more than 4% of the company’s shares, has waged a campaign as it seeks to oust the current board of directors. SQN in its letter to other shareholders alleges that the current board has failed to take responsibility on recent strategic and operational missteps. The investor has especially taken issue with the recent quarterly earnings where the company failed to meet estimates. The campaign to oust the current board comes on Yelp struggling to hit the desired growth metrics. Revenue expansion has dropped below 2% spelling trouble for the company when it comes to positive cash generation. The management has already downplayed the concerns reiterating it is ready to sit down with the hedge fund to sort out the issue. Competition is another headwind that continues to affect Yelp performance in the market. Google continues to eat into the company’s operations have improved its restaurant search feature in the recent past. People using social networks such as Instagram to recommend favorite dining and travel destinations continues to affect Yelps core business.

Bottom Line

While Yelp has bounced back after the recent sell-off, it remains in a precarious position. Weakening underlying fundamentals spell trouble for the online review site. That said the stock looks set to remain under pressure until the management reiterates growth prospects and shrugs off competition posed by other players in the sector.

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