Pacific Crest: Many Short-Term Challenges Facing Yelp

Pacific Crest issued a company update on Yelp Inc YELP after analysis showed that mobile and traffic headwinds could continue and extend underperforming user results. Pacific Crest rates Yelp as Sector Weight, while a price target is currently unavailable.

Analyst Evan Wilson wrote, "These headwinds are likely to continue to challenge Yelp's organic growth in the near term. Yelp's own consumer advertising could offset this effect in part, but we still think growth could be challenged. Yelp remains at the crossroads of exciting Internet themes, but is clearly closer to realizing its full potential than we realized or that valuation supports. Potential user declines during the revenue deceleration and expense acceleration phase that we have seen is a bad combination, especially when contribution from new opportunities (international and platform) seem far away."

Pacific Crest cites four specific headwinds for Yelp:

1. Yelp's trustworthiness continues to decline based on a first quarter consumer technology survey.
2. Google Inc GOOG's planned mobile algorithm update brings uncertainty to how Yelp's interface will be affected.
3. International user growth: There are reports that Apple Inc. AAPL maps are using other competitors internationally.
4. Increased competition from Amazon.com, Inc. AMZN's Amazon Home Services.

Analysts believe that what makes Yelp valuable are its over 71 million reviews across 10 categories. The reviews are very extensive, thus are difficult to replicate. However, Pacific Crest cites the growing number of competitors and their increased advertising spending as potentially taking market share from Yelp. This in turn will cause Yelp to have to increase their spending to remain the market leader, which may cause problems with profitability down the road.