Here's Why You Might Want to Think Twice About Yelp Inc

While investors praise Yelp for a nice quarter, all fears regarding a recent probe and business practices have gone out the window. Essentially, there's a big question of uncertainty hovering over Yelp, and while the company grows fast, peers such as LinkedIn and Facebook would likely make far better investments.

A strong quarter indeed
Yelp's stock soared nearly 10% after the company's revenue grew 65.6% in the first quarter to $76.4 million, thus beating expectations. In the first quarter, the company saw major improvements in all notable areas of its business, including a 95% increase in international traffic.

With the stock losing more than one-third of its value since March, many believe Yelp is a golden investment opportunity. Yet, there is one overhang that could make Yelp's recent gains look like a trap.

Don't forget, this could be serious
Just last month a Wall Street Journal probe, combined with an article in the LA Times, unmasked a slew of problems related to the legitimacy of Yelp's review and its pushy business practices. Reportedly, Yelp has been accused of hurting the ratings of local businesses, who refuse to advertise on the site, and removing bad reviews for paying businesses. It's worth noting that local business accounts grew 65% to 74,000 in the first quarter.

With that said, there is a large-scale investigation ongoing into the origination of reviews, their legitimacy, and it could lead to litigation. To get an idea of its scale, there have been more than 2,000 FTC complaints filed against Yelp, and the company reported, on average, six subpoenas per month.

Better options available
Yelp trades at 20 times sales, and while the above allegations might be nothing, it does pose a significant risk on a stock that's priced for perfection. Therefore, LinkedIn and Facebook might provide a better opportunity for investors who want to be in this space.

LinkedIn is currently down 30% in 2014 and even lower today after the company was criticized for its full-year revenue guidance. Yet, with $2.07 billion in revenue expected, LinkedIn should grow 35% this year .

Furthermore, its largest segment, talent solutions, is still growing at a 50% annual clip. Therefore, with LinkedIn trading at a near 50% discount to Yelp in terms of sales, and also profitable with operating margins of 3.1%, it likely presents more upside potential.

Facebook trades at a multiple that is similar to Yelp, at 17.4 times sales, but with an operating margin of 40% and 60% growth, Facebook is much more profitable. Not to mention, Facebook is still in the infancy of monetizing its near 1.3 billion monthly active users.

In 2014, Facebook has announced both a new video advertising service, which will open it to new advertisers, along with a payment processing system. Therefore, with nearly $9 billion in annual sales, Facebook still has a lot of opportunities for monetization, and to create higher profits.

Final thoughts
In the social media space, we are often prisoners of the moment and quickly forget recent events due to eye-popping headlines. In many ways, Yelp is a great example, as the allegations against it are severe, challenging the legitimacy of its entire business model. And if the claims prove true, its enormous valuation means it could fall a long way.

Hence, with there being many good opportunities within this space, investors might want to think twice about chasing Yelp's recent gains.

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The article Here's Why You Might Want to Think Twice About Yelp Inc originally appeared on

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Yelp. The Motley Fool owns shares of Facebook and LinkedIn. 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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