What Are the Biggest Risks Facing Yelp Investors?


The rise of social networking has made a lasting and substantial impact on consumers and investors alike. As most people know all too well at this point, Facebook led the wave of the so-called "Web 2.0" companies that made their recent debuts on the public markets. However, many of these companies in some way incorporated the notion of "social" into their business models, one of which is local review site Yelp . Like many other its of recently public brethren, Yelp shares have sagged somewhat since they went public. However, that isn't to say that the site's potential has fallen by the wayside. In fact, the Fool recently published a special research report on Yelp. We decided to include a brief except from that report below. Enjoy!

Investors are just getting to know Yelp. It went public in March at $15. The good news is that it has posted narrower deficits than Wall Street was expecting in its first two full quarters as a public company. The bad news is that we're still looking at deficits.

Analysts see Yelp turning the corner of profitability in the latter half of 2013, but obviously there are no guarantees that it will happen.

Yelp's biggest risk is that the disrupter will be disrupted. Google turned heads with the acquisition of Zagat in 2011 and Frommer's in 2012. It now has the reviews-fueled brands to build out its local listings.

There's always the risk that Facebook or Foursquare with their eatery check-ins will become Yelp rivals. Facebook, in particular, can be problematic. The social networking giant already has a team working on taking search to the next level by incorporating friend submissions into results. If a search for sushi can be satisfied by recommendations among Facebook friends -- without having to power up Yelp for the collective opinions of strangers -- Facebook could go from being an ally to being a threat. However, Google is the more logical disruptive competitor at this time.

There's also the concern that users sour on Yelp. After all, what good is a community hub if the content creators move on? Yelp pampers its most active participants. The Yelp Elite -- really, that's what the active community members are formally called -- are treated to local restaurant and bar openings and other event invitations.

Merchants can also sour on Yelp. Stories over the years have claimed that merchants were told that becoming premium members would help them wipe out negative reviews, though the company has defended itself against those accusations. Either way, Yelp's reputation is at stake so it needs to make sure that the reviews are honest and that its tens of thousands of paying marketing customers don't get too powerful.

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The article What Are the Biggest Risks Facing Yelp Investors? originally appeared on Fool.com.

Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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