Ouch. Yelp just got a terrible review from Wall Street.
Yelp shares plummeted 27% on Wednesday to their lowest level since March 2013. The online review platform alarmed investors by revealing another slowdown in traffic growth and downgrading its sales targets for the fourth quarter in a row.
Yelp further spooked Wall Street by saying it’s struggling to hang on to its employees and attract new talent. That problem speaks to Yelp’s branding headaches. Media reports about fake reviews appear to be tarnishing the platform’s image in the minds of consumers, business owners and employees.
“You’ve got this cloud of distrust. The end result is that people are using it less and less. That is a going-out-of-business trend,” said Rob Enderle, principal analyst at the Enderle Group.
All of this is bad news for a company that has been losing momentum for months. The stock used to trade above $100 in March 2014. Now it trades under $25 a share. Hopes that a bigger tech company will acquire Yelp have failed to materialize.
Traffic slowdown: Yelp said its desktop traffic declined 3% during the second quarter from the year before. App traffic surged and mobile traffic jumped 16% over last year, but that growth was slower than the first quarter.
“Traffic growth is slowing down pretty dramatically,” said Sameet Sinha, an analyst who covers Yelp at B. Riley & Co. Sinha downgraded his price target on Yelp to $20 and kept a “sell” rating on the stock — something that’s pretty rare among tech stocks these days.
Talent war hits Yelp: Yelp now expects to generate 2015 sales of $544 million to $550 million, which is below Wall Street’s targets. The company said the main driver of the scaled-back sales forecast is the inability to hire enough sales people.
There’s no question there is a talent war taking place in Silicon Valley. Fast-growing startups and Internet companies are fiercely battling over the best sales people and engineers. That means sales people — who make money on commission — can pick and choose which brands they want to hitch a ride with. Right now, they aren’t choosing Yelp.
Not only are some consumers questioning the legitimacy of the reviews they are reading, but small business owners upset about receiving negative Yelp reviews may be less likely to buy advertising on the platform.
“Trying to sell against a brand is hard work. I wouldn’t want that job,” said Enderle.
Yelp’s plunging stock price doesn’t help the talent problem either. Workers hopping to cash in their stock options at higher prices are now staring at a stock that’s down 55% this year alone.
Can Yelp be rescued? While Yelp’s growth numbers have slowed down, it’s not like the brand is irrelevant. More people are still coming to the site compared to the prior year, and total reviews grew by 35% over the past year. That means people are still using the service.
“Consumers still love Yelp. The core asset of Yelp is healthy. Investors just ran out of patience today,” said Gene Munster, an analyst who covers the stock at Piper Jaffray.
Munster believes Yelp’s struggles are being less driven by problems with the brand and more by the increased effort required to fight for people’s time on apps and mobile more broadly. Yelp plans to spend $30 million on marketing efforts this year, compared with very little traditionally.
Fire sale ahead? Earlier this year there was hope that Yelp would be acquired by a larger tech player. But media reports indicate Yelp abandoned its sale effort.
It’s not clear if potential acquirers like Google, Alibaba, Yahoo or AOL will take a look now that Yelp’s stock is in the toilet. They’ll have to decide if it’s easier to repair Yelp or to simply start a new product from scratch that improves on Yelp.
“Yelp continues to be extremely important to many, many consumers and has high influence. But they are going through a tough time that we don’t see any easy answers to,” said Kevin Kopelman, an analyst who covers Yelp at Cowen & Co.