Why UBS Is Selling Yelp And Groupon

UBS’s Eric J. Sheridan downgraded the ratings for Yelp Inc YELP and Groupon Inc GRPN from Neutral to Sell, saying that the performance of the two companies is likely to be hit by increased competition and share gains by bigger players.

Analyst Eric Sheridan believes that only those companies would succeed in the fight for local advertising budgets that have established large mobile user bases, benefit from operating scale advantages and have shown product innovation while leveraging new technologies.

The lack of operating scale required to drive additional investments in innovation to counter-act the platform strength of bigger players is a major concern area for both Yelp and Groupon, Sheridan commented.

Yelp

The price target for Yelp is at $17. Despite making several efforts, Yelp has lagged in user growth, product innovation and the necessary tech investments. Sheridan expects the company to enter a period of slowing revenue growth and increased margin pressures, driven by increased competition in its core business.

Decelerating traffic growth, rising marketing and salesforce hiring costs to produce growth, investments in international and increased competition are the key concern areas hampering Yelp’s growth prospects, the analyst noted.

Groupon

The price target for Groupon is set at $3.20. While the company has taken steps to transform itself into an ecommerce marketplace, there is still a long road ahead for the company to attain a strong position in the local ad market, the USB report noted.

The company’s future performance is likely to be adversely impacted by the marketing spend and pressure on near-term margins, slowing customer and engagement growth and the mix shift to lower margin IP business, Sheridan stated.