In its heyday, Yelp got the attention of American consumers with reviews of local businesses. The company’s slow growth and lacklustre share price performance have now brought it scathing critiques from an activist investor.
On Tuesday, TCS Capital Management called for Yelp to explore a sale or combine with online services company Angi. TCS, which holds a stake of more than 4 per cent in Yelp, claims it is “shockingly undervalued” and worth more than twice its share price.
That looks a stretch. Founded in 2004, Yelp popularised user-generated write-ups. It quickly became the dominant platform for restaurant and business reviews. Rapid growth led to a splashy initial public offering in 2012. At its peak in 2014, the stock traded at nearly $100. Even after Tuesday’s 8 per cent price gain, these change hands at just $35.
Yelp has struggled to fend off rivals. Hungry diners can turn to Google, Open Table, Urbanspoon and even Instagram to find restaurant recommendations. Meanwhile, small business appraisals have become more fragmented and specialised. Angi, owner of Angie’s List, focuses on home improvement and local tradesmen.
Yelp generated $1.2bn in revenue last year, helped by gains in advertising sales. But its share of US digital advertising spending stood at just 0.4 per cent last year, down from 0.9 per cent in 2017, according to research group Insider Intelligence.
Merging with Angi, as proposed by TCS, should generate cost savings. But Angi loses money and trades at just 0.8 times revenue, compared with Yelp’s 1.8 times. Given the tough environment for digital ad sales, even with economies, there is no guarantee that the business will be on a better footing for growth.
Yelp has a solid balance sheet with no debt. It holds $414mn in cash and cash equivalents which may have attracted TCS.
A better solution for Yelp than a combination with Angi would therefore be a private equity buyout. A decent cash payout would then generate positive reviews from minority investors.