Can Yelp Guide You Toward Profits?

With shares of Yelp (NYSE:YELP) trading at around $19.39, is YELP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Let’s start about by saying that more people hate Yelp than love it. At least this is true from an investing standpoint. At the present time, 55.20 percent of the float is short, which is exceptionally high. Shorts aren’t always correct, but when you see numbers this high, they’re correct a lot more often than they’re incorrect. It shows a lot of conviction, and that conviction has to come from somewhere.

The first and most obvious negative is that Yelp isn’t profitable. In addition to that, we have seen decreasing net income since 2009, the profit margin is a miserable -18.83 percent, guidance has been lowered, and it’s possible that many Yelp reviews have been paid for, which defeats the purpose of the site. Feeling nice and cozy yet? Let’s not also forget that Apple (NASDAQ:AAPL) is rumored to be interested in FourSquare. If a deal like this were made, it could eventually have a severe impact on Yelp.

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On the positive side, Yelp has an Alexa ranking of 232 and a U.S. Alexa ranking of 59. That alone has tremendous value. With tens of millions of visitors per month, traffic isn’t a problem. Therefore, monetization of that traffic should be easy. While the revenue has been there, the earnings have not. Yelp’s app is currently average 8.2 million uniques per month, which is excellent, and this number should continue to grow. Another potential positive is that Yahoo (NASDAQ:YHOO) just added Max Levchin to its board. It might be a longshot, but since Levchin is Chairman of the Board at Yelp, it’s possible that some form of deal could take place in the future.

Now let’s take a look at some numbers.