Yelp’s (YELP) recovery at stake as widespread biz closures weigh on sentiment

The economic uncertainties and widespread disruption have shed light on the relevance of the services offered by Yelp Inc. (NYSE: YELP), in the post-COVID world. But the online review platform follows a business model that is often influenced directly by the fiscal health of its partners.

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So, the virus outbreak had a relatively larger impact on Yelp, prompting the management to furlough several hundreds of employees to reduce cost. But the move will have a temporary effect as the company is planning to reinstate most of those employees as normalcy returns to the market, once again pushing up expenses.

Focus on Restaurant Biz 

With food review being the main category, the sharp fall in restaurant footfall has affected Yelp’s site traffic and advertising revenue. About 53% of the restaurants that went out of business since the onset of COVID is estimated to have closed permanently. Initial estimates show that the weakness seems to have extended into the early weeks of the current quarter. The other headwinds include the change in consumer behavior during the COVID-era and reduction in ad spending, which is expected to continue as long as the shelter-in-place order is in place.   

Meanwhile, the company’s services segment has remained mostly resilient during the crisis days. With an increasing number of businesses shifting to the digital space, Yelp can look to maintain a stable user base in the coming days and keep customers informed about various products and services. The restaurant page of the site currently features a section that allows businesses to notify their COVID safety guidelines. On the posited side, the number of people using the platform is likely to grow in line with the increase in online search volumes.

Getting on Track

Going ahead, Yelp should stay up-to-date with all the information sought by customers to resonate with them and keep contributors engaged. It will be a challenging task given the volatility of the situation and also the management’s decision to operate with a significantly smaller sales force. The company needs to streamline its revenue engine to be able to achieve the goal of re-acquiring any lost business. Navigating the pandemic successfully will also depend on at what rate the affected customers survive it.

Review Power

Studies have shown that reviews can play an important role in business reputation management and generation of lead. Yelp has been one of the preferred platforms for enterprises to find partners, and for that reason companies would be keen to have Yelp profiles.

The effective use of technology to ensure the authenticity of content shared on the platform, such as automated filtering to remove misleading posts, gives the company an edge over rivals. Meanwhile, the entry of new players and widespread use of technology has added to the competition. It is believed that users rely more on Yelp reviews than advertisements published on the site to make purchase decisions.

Analysts are of the view that Yelp’s stock is unlikely to return to the growth path in the near future. The weak target price calls for caution and it would be wise to hold it for the time being. Prospective investors are likely to adopt a wait-and-watch policy.

Weak Start to FY20

In the early months of fiscal 2020, the market slowdown weighed on financial performance and Yelp slipped to a loss of $0.22 per share from a profit last year, despite a 6% growth in revenues to $250 million. The top-line growth was driven by advertising, the main revenue source, which was partially offset by lower transaction revenues.

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Click here to read Yelp’s Q1 2020 earnings conference call transcript

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Though the stock has come out of the slump that followed the coronavirus attack, the recovery has been sluggish compared to others in the tech sector. The shares closed Monday’s regular session at $23.82, after gaining 41% since falling to a one-year low in mid-March. The stock is currently trading down 76% from the record highs seen around six years ago.