Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Yelp is Not Making Money

Yelp (NYSE: YELP) is one of the worst and most overvalued stocks around these days. The business review service was trading at $33.71 a share on March 3, 2017, yet it was not making any money.

The company reported a “net income” of -$4.67 million on December 31, 2017. Disturbingly that was an improvement over December 2016 when Yelp’s “net income” was -$32.9 million. It was also better than September 2016 when Yelp reported a loss of -$35.16 million for a net income.

Yelp has reported a negative net income for four quarters straight, yet people are still buying the stock. What exactly are they investing in beyond hot air and hope? It’s certainly not the free cash flow, that was just $36.32 million on December 31, 2016, nor was it the return on equity that was -.63% on December 31, 2016.

There is of course the cash from operations which was $126.9 million on December 31, 2016. That’s right Yelp managed to achieve a “cash flow” of just $126.9 million, that certainly does not justify the stock price.

Yelp is Losing Money

What is truly fascinating and rather bothersome is that Yelp supposedly has a profit margin of 4.24% yet no money is coming in.

Given Yelp’s net income I would say the profit margin figure is meaningless. Yelp is making a little money but it’s losing faster than it can generate more cash. That of course is one of the major problems with social media.

Yelp suffers from another classic social media predicament breakneck growth that does not lead to cash. Yelp’s revenue growth in 2016 was impressive, it added $163.36 million in revenues over the course of the year.

Since total revenues at the end of fourth quarter 2016 were $713.07 million that means Yelp’s revenues grew by more than 20% which is good. The problem is that the growth is not leading to money.

Why Yelp is not Making Money

A major problem here is the nature of Yelp’s “service” it offers reviews of businesses online. This gets sold to a business once; it leads to no new customers, so the business owner drops the service.

That means Yelp has to send out salespeople to sell to more businesses. The salesperson makes money in the form of commissions, but Yelp only makes money once.

Instead what you get is classic churn, the company has to constantly add new customers just to maintain its level of revenue. This is a lot like a low end insurance company and its bad news because it produces absolutely no float.

The digital businesses that generate a lot of cash, create a lot of float in the form of repeat customers. Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) AKA Google, PayPal (NASDAQ: PYPL) and Facebook (NASDAQ: FB) get lots of repeat customers.

That leads to lots of float; in the form of monthly subscriptions, or fees that keep rolling in every month and generate lots of cash flow. It’s one of the secrets to Alphabet (NASDAQ: GOOGL) and to Berkshire Hathaway (NYSE: BRK.H). The float forms a stream of cash that the company can tap for expansion, acquisition, marketing, research and development borrowing or anything else it needs.

Since Yelp has no float it has no money. Instead it has a very lousy business model that pays money out but brings no cash in. That’s also why Yelp is unable to pay a dividend it simply lacks the money.

Can Anybody Compete with Google?

Yelp’s failure to generate money also raises an interesting question: can anybody compete with Google? The whole idea behind Yelp is to put information about businesses online but Alphabet already does for free at Google.

Anybody with a computer; or a smartphone, can use Google to find out almost anything he or she wants about a company. That includes reviews, descriptions, prices, location, advertising, and almost any information a customer might want.

All you get at Yelp are basically complaints about the firm or its services which might tell you absolutely nothing at the end of the day. Such a review is simply somebody’s opinion of the business.

Those searching for information go to Google because it is there. That’s why Google’s advertising is so effective and why Alphabet now owns advertising.

Yelp’s failure proves that you cannot compete with Google and that it is almost impossible to make money in social media. Simply having a fast-growing service with a catchy name is no guarantee of cash flow.

Stay away from Yelp folks, it will not make money anytime soon and probably collapse at some point. If you want to make money in Social media buy Facebook stock, if you want to make money from advertising buy Alphabet shares. If you want to lose money buy Yelp.

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