Yelp (NYSE: YELP) has the dubious distinction of being the most hated social media company in America. The ratings service is regularly and routinely attacked by radio hosts and other celebrities and despised by untold numbers of small business people.
It has also become the center of a great deal of controversy, including lawsuits. USA Today reported that Prestigious Pets, a Dallas company, has sued Michelle and Robert Duchouquette of Plano, Texas, for posting a bad Yelp review about its services. The service is seeking $6,766 in damages; if it wins, the case could undermine Yelp’s business model by making customers afraid to post reviews.
Most likely Yelp reviews are protected by the First Amendment to the U.S. Constitution, but it might take years of litigation and appeals, possibly all the way to the U.S. Supreme Court to establish that precedent. Naturally, such legal action will cost a fortune. Would it be justified?
This, of course, brings us to the most important question of all: Does Yelp make money? Would a lawsuit designed to protect the free speech rights of Yelp reviewers be worthwhile or not?
Yelp Does Not Make Money
Judging by Yelp’s financial numbers, the answer would be an emphatic no. The business review service is actually losing money in an embarrassing way right now.
On December 31, 2015, Yelp reported a net income of -$32.9 million, a profit margin of -14.46%, revenues of $549.17 million, an earnings yield of -2.4%, an earnings per share ratio of -.44 and a free cash flow of -$5.01 million. That means its operations are losing money and will probably continue to do so for the foreseeable future.
A big problem was Yelp’s cash from operations, which was a paltry $57.36 million for the fourth quarter of 2015. To make matters worse, its revenue was tiny: $549.17 million compared to $17.93 billion for Facebook (NASDAQ: FB). Facebook also reported a net income of $3.688 billion on December 31, 2015.
It appears that Yelp simply has not figured out how to make money from its business. Although its revenue, like that at Facebook, has grown dramatically. Yelp reported a TTM revenue of $377.54 million in December 2014; that grew to $549.71 million a year later.
Yelp Is No Bargain
That makes for an increase of $171.63 million in a year, which is impressive, but the other numbers indicate that revenue is not translating into cash. Yelp’s numbers look a great deal like those at LinkedIn (NYSE: LNKD) and Twitter (NYSE: TWTR), which have also experienced serious revenue growth over the past year.
As at Yelp, that revenue has not translated into cash; LinkedIn reported a net income of -$159.24 million on December 31, 2015. Although, Yelp is very cheap when compared to LinkedIn; it was trading at $18.34 a share on February 19, 2016. LinkedIn was trading at $114.12 a share on the same day, proving that Ben Graham was right; Mr. Market is insane.
Despite that difference and low price, Yelp is no bargain. It had a market capitalization of $1.384 billion and an enterprise value of $1.013 billion on February 19, meaning the stock is overpriced.
Is There a Social Media Bubble?
Naturally, this will lead many people to ask if there is a social media bubble. The answer is that social media stocks are certainly overpriced, but there is no bubble, because the amounts invested in them are miniscule when compared to the overall market. Yelp had a market cap of just $1.384 billion for example.
Instead of a bubble, we have a few overpriced shares, of which Yelp is the worst example. Most likely the success of companies like Facebook and the revenue growth at Yelp and LinkedIn is convincing investors that these stocks could be major moneymakers at some point.
Despite that, Yelp is looking a great deal like an overpriced junk stock. My advice for now would be for investors to stay away from all social media except Facebook. Facebook is the only social media company making money. Avoid this sector like the plague until that changes.