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Analysts are losing hope for Yelp
(AP Images) Yelp CEO and co-founder Jeremy Stoppelman
Deutsche Bank analysts hit Yelp with a biting downgrade, reducing their price target from from $56 to $31 because of “deteriorating fundamentals” at the company.
The trouble, according to the analysts, comes primarily from Yelp’s local advertising woes. The salesforce at Yelp has been been growing while the number of local advertising accounts has been falling. And the lack of local advertising accounts has real consequences for consumers — you end up not getting ads that are useful to you.
The analysts shared a humiliating anecdote about Yelp's advertising efficacy: “A recent search for a fish market yielded an ad for a donut shop. Don’t get us wrong, we love donuts, but not when we’re looking for some salmon to grill. Similarly, when searching for ramen, we were served an ad for a Japanese restaurant eight miles away in a different borough.”
Given these types of results, it’s not surprising Yelp has trouble acquiring and retaining advertisers, the analysts wrote.
Deutsche Bank had previously been optimistic about the future of local advertising on Yelp, hoping that as Yelp brought more “transactions” onto the platform instead of just searches, this would help drive advertising. Yelp could prove, tangibly, that traffic led to sales. The analysts say not only that this hasn’t happened, but that they are “beginning to doubt it ever will in a meaningful sense.”
In a particularly brutal snippet, the analysts wrote that as Yelp has backed away from the possibility of selling, the “asset value” provides less of a safety net for a deteriorating company. This is a strong indictment of Yelp’s current direction and management, one the market seems to agree with. Yelp shares fell more than 13% early in July in immediate aftermath of Bloomberg reporting that the company was not looking to sell itself.
But advertising problems are not the only ones facing Yelp. Traffic to the site could decline for the first time ever, according to a note earlier this month from analysts at B. Riley. The cause seems to be two recent Google search algorithm changes, which have affected all local search directories. The top 30 local directories, excluding Yelp, have had their traffic decline about 35% in the past 28 months.
And there have been accusations that Google isn’t playing fair. According to a Yelp-funded research paper from prominent law professor and Internet scholar, Tim Wu, Google manipulates its search results in a way that hurts both its competitors and its users. The study claims that when Google privileges its own content over the "organic" results its search algorithm picks, as in the case of restaurant reviews, it actually reduces “social welfare.”
Google denies this, and a spokesperson previously told Business Insider:
"This isn't new — Yelp's been making these arguments to regulators, and demanding higher placement in search results, for the past five years. This latest study is based on a flawed methodology that focuses on results for just a handful of cherry-picked queries. At Google we focus on trying to provide the best results for our users."
Regardless of whether Google has a hand in Yelp’s slow-motion tumble, Deutsche Bank are “stepping to the sidelines” and downgrading the company from “buy” to “hold.”
Yelp declined to comment on the note.
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