Yelp Down To Underperform At Wells Fargo

Wells Fargo’s Peter Stabler believes the consensus expectations for Yelp Inc (NYSE: YELP) for 2017 and 2018 could prove overly optimistic.

Stabler downgraded the rating on the company from Market Perform to Underperform.

Challenges To Margins

Although the company has been able to build “a valuable library of differentiated content, a highly recognizable brand, and a strong (and improving) user experience,” the analyst believes there could be challenges to meeting long-term margin targets.

Stabler expects Yelp to witness intensifying competition and increasing challenges associated with cost per click (CPC) migration.

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The company’s Home & Local Services business not represents almost 30 percent of Yelp’s local ad revenues and the analyst believes that there could be increasing risk from “large spending pure-play verticals.”

Increasing Competition

“We agree with management that local commerce offers an attractive opportunity for online transactions, but here we see Yelp positioned against deep-pocketed rivals that either have significant head starts or pure-play ambition against a relatively unproven revenue vertical,” Stabler stated.

International traffic trends also indicate there could be challenges ahead, and Stabler believes Yelp might need to make significant marketing investment to reignite user growth, which would add risk to the medium- and long-term margin expectations.

The 2016 GAAP EPS estimate has been lowered in accordance with management’s expectations for 2H16, while the estimates for 2017 and 2018 have been lowered to reflect expectations of “an increasingly challenging competitive revenue and profit environment.”

At time of writing, Yelp was down 2.47 percent on the day at $29.63.

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