Over the last six months, Yelp’s shares have sunk to $30.52, producing a disappointing 14.3% loss - a stark contrast to the S&P 500’s 14.4% gain. This may have investors wondering how to approach the situation.
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Why Is Yelp Not Exciting?
Even though the stock has become cheaper, we're swiping left on Yelp for now. Here are three reasons we avoid YELP and a stock we'd rather own.
1. Change in Paying Advertising Accounts Points to Soft Demand
As a social network, Yelp generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.
Over the last two years, Yelp’s paying advertising accounts, a key performance metric for the company, increased by 7.4% annually. This growth rate is slightly below average for a consumer internet business. If Yelp wants to reach the next level, it likely needs to enhance the appeal of its current offerings or innovate with new products. 
2. Growth in Customer Spending Lags Peers
Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Yelp’s audience and its ad-targeting capabilities.
Yelp’s ARPU growth has been mediocre over the last two years, averaging 3.1%. This raises questions about its platform’s health and ability to engage its users effectively. 
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Yelp’s revenue to rise by 1.1%, a deceleration versus This projection doesn't excite us and suggests its products and services will face some demand challenges.
Final Judgment
Yelp isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 5.4× forward EV/EBITDA (or $30.52 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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