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Yelp Plunges Further: Ad Pricing a Concern for Investors? - Analyst Blog

Shares of the online reviewing website, Yelp Inc.YELP , have been declining for quite a while now. Last week was a nightmare for the company, with a nearly 14% plunge in its share price since Jun 26. In fact, the stock plummeted over 10% on Thursday as investor confidence plummeted.

A report published by research firm, Pacific Crest, reveals the restaurant industry's perspective related to ads placed on Yelp. The report stated that the company has been overcharging for ads, the returns from which have been lower than expected, especially for small businesses and independent restaurants. Even the larger restaurants are reportedly not too happy with Yelp ads, given the presence of a significant number of negative reviews on the site that have been taking a toll on their businesses.

According to the report from Pacific Crest, independent restaurant operators receive average revenues of $4,600 from Yelp against their spending of $7,200 per annum on local ads.

Since restaurants contribute about 15% of the company's total revenue, Pacific Crest stated that the impact of declining sales in this sector can be significant for Yelp. However, the research firm did not provide any update about the performance of Yelp ads in other sectors.

Nonetheless, this is not the first time that Yelp has been accused of overcharging advertisers. Back in 2012, the company had faced a significant challenge due to a similar issue. According to media reports, at that time, Yelp was charging small businesses 1,000x the standard online cost per thousand impressions (CPM). While online advertising costs about 60 cents CPM, Yelp was charging around $600 CPM. On the other hand, compared with national advertisers on its own platform, the company had been charging a premium of 100x.

However, this was not the only factor pulling down share prices last week. A lot of the negative sentiment can also be traced to management's decision not to sell the company. With sales being as they are and competition heating up, investors aren't looking for a better return than a lofty takeover price could fetch.

According to reports, the company, along with The Goldman Sachs Group, Inc. GS , was looking for a suitable acquirer. However, recently the founder, Jeremy Stoppelman, stalled the process in yet another attempt at revival.

The stock currently carries a Zacks Rank #4 (Sell). Changyou.com Ltd. CYOU and Tucows Inc. TCX are some better-ranked stocks in the space, each sporting a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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