Yelp Has to Work on Its Sales Since It Is No Longer for Sale

07/07/2015 7:00 am EST

Focus: STOCKS

The possible sale of one online firm is now off the table while another is also struggling and Chris Lau, of Kapitall.com, thinks traders should still expect a continued downward trend. Until the firms show signs of improving business, Chris feels neither stock is likely to recover.

Now that Yelp is longer on the market, it still has to address its problems. The same goes for Groupon, too.

After Yelp (YELP) temporarily halted its plans for a sale on July 2, the stock unsurprisingly fell to below $40 and is just barely above its yearly low.

Yelp is a pure speculation play. The company may have attracted some bids, but the offers were likely at a discount to the stock price, which has fallen over 32% from $55.15 at the beginning of the year and is nearing its 52-week low of $36.10.

Though revenue from the firm is still growing each quarter, the company could do better. In the first-quarter, Yelp increased its sales head count by 25%. It spent 20% of its revenue on product development.

Furthermore, as Bloomberg points out, only 1.5 million transactions have been made through the Yelp Platform, which launched in July 2013 with the intention of directly connecting consumers with vendors. Considering that—on average—142 million visitors visit Yelp each month, the company has a lot of room to grow in this area.

Groupon (GRPN) is another online firm that is struggling. Last month, Jason Child, Groupon’s CFO since 2010, said he would leave the company. The stock is down over 40% this year:

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Groupon's costs are high. During the first quarter of 2015, the company spent $53 million in marketing. It spent another $41 million, indirectly, through order discounts. Put together, the total cost was $94 million. Search engine marketing display costs were $2 million higher than last year. Yelp is allocating its spending differently. As mentioned, in the first-quarter earnings call, the company chose to spend money on developing its mobile app, which now accounts for 65% of Yelp's total searches.

Additionally, Groupon's income is falling. In the first quarter, active customers grew, but the average billing per active customer fell to $135. It was $155 in the preceding quarter.

Expect a continued downward trend for Groupon and Yelp. Until the firms show signs of improving business, neither stock is likely to recover.

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1. Groupon Inc. (GRPN): Operates online local commerce marketplaces that connect merchants to consumers by offering goods and services at a discount worldwide. Market cap at $3.28B, most recent closing price at $4.85.

2. Yelp Inc. (YELP): Operates a platform that connects people with local businesses in the United States. Market cap at $2.76B, most recent closing price at $38.18.

By Chris Lau of Kapitall.com

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