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Yelp, Inc. (YELP) Shares Not Liking Facebook's (FB) Graph

 January 16, 2013 02:53 PM

(By Rich Bieglmeier) Yelp, Inc. (YELP) got chewed up and spit out yesterday on news that Facebook, Inc. (FB) launched an internal search engine called Graph. The fear is that Facebook users will search reviews for where to eat, shop, drink, relax, and play on graph rather than the opinions locals found on Yelp.

Yelp shares have yelped since Mark Zuckerburg's Graph, dog and pony show. The stock is down more than 10% from Tuesday's opening price of $22.27. FB's announcement and YELP's reaction has the Twitter world twitting – twits increased more than 1,200%.

Twitter opinions are mixed:

[Related -Yelp Inc. (YELP) Q2 Earnings Preview: About to Pound Wall Street’s Expectations?]

atlantatweeps writes, "$YELP laughing at $FB search" / its like YELP but without all the content and reviews."

Howardlindzon agrees, "only $YELP can kill yelp...but investors do scare easily in low rev biz's. "

DeidreZune dissents, "But $FB competitors are not faring well. $YELP is yelping. Mighty $GOOG now faces cloudy skies. $FB search is really #USEFUL #INNOVATIVE."

Patient investors might be able to get YELP shares a little cheaper if they are interested in buying weakness. There is a thin layer of support near and in today's price range. However, just about a buck lower we find multiple layers of support.

[Related -Facebook Inc. (FB) Q2 Earnings Preview: Scoring Big on the World Cup]

After crashing in early November, the online review site had a difficult time getting on top of and staying north of $19. The stock seemed to break out of that mess at the start 2013, only to be sent reeling by Facebook's announcement. In addition, YELP's 50-day moving average shares the same neighborhood at $19.18. We think there is a better than 50% chance that YELP tastes the 50-day benchmark.

It's too early to tell what sort of impact Graph will have on Yelp traffic. But, we can take a look at web traffic and search queries to see how well YELP is doing as of late.  

According to Alexa.com, YELP's year-over-year web traffic is down; however, search queries are up about 20%. The apparent conflict makes sense in this context; people tend to be more specific when searching than when visiting a site. For example, Domino's Pizza YELP review versus going to yelp.com and then looking for Domino's – makes sense, right?

Wall Street believes YELP will earn 2 cents in 2013 and generate earnings growth of 18.50% for the next three-to-five years. Meanwhile, 2013 revenue is slated for 52% growth.  At $20, the stock trades at 1000 times 2013 eps. That's a little rich for us.

And so are YLEP's price-to-sales of 10.75, price-to-book (although probably not an important metric for a company like YELP, yet) of 8.97, and negative returns on equity and investment.

Overall, Yelp, Inc. (YELP) is appropriate for speculative investors, in our view. The company has to prove its model can turn a profit, and now that it can stand against Facebook; two uncertainties and you know how much Wall Street like uncertainty.

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