Yelp (YELP) Tumbles on Brutal Downgrade

The hits keep coming for Yelp (NYSE: YELP). Shares of the online review site plummeted Thursday after they were downgraded to Sell at B. Riley, which cited accelerating traffic headwinds in the fourth quarter and a difficult year ahead.

Analyst Sameet Sinha sliced the price target on the stock to $15 from $21, suggesting 32% downside from Wednesday's close.

Sinha said 2016 will be another difficult year for YELP with declining traffic, tough comps in App D/L growth, reduced ad spend effectiveness and increasing competition.

The analyst highlighted the following items to support this view:

Traffic trends worsening. According to Quantcast, Q/Q traffic in 4Q15 was -13% which compares to a -2% drop they saw in the same period last year (-3% as per YELP). This would imply an -8% Y/Y decline for 4Q15.

"While management has indicated expectations for a seasonal decline in traffic in 4Q15, we believe -13% is indicative of a major problem as it implies traffic decline for the first time on a Y/Y basis," the analyst said. They believe GOOGL is to blame.

Advertising effectiveness also declining. The cost of new App install rose from $3.30 in 1Q15 to $5.00 by 3Q15, the analyst highlighted.

"If App installs also see seasonal headwinds, we can expect cost per download to continue to increase in 4Q15 as well," Sinha said. "This could potentially necessitate higher spend as it is a strategic imperative for YELP to develop its own sources of traffic, especially as GOOGL applies additional pressure."

Competition is increasing. Facebook, Google and Amazon have been aggressively targeting YELP’s market. FB has two initiatives, GOOGL has in-house initiatives as well as a new deal with Homeadvisor and AMZN is expanding its Home services segment aggressively. In addition, Eat24 could also see increased competition with an increasingly competitive food reservation and delivery business, where once again they are seeing some large, deep pocketed competitors enter.

The firm lowered 2016/2017 AEBITD.

The analyst said a sale of the company or new sales hires driving revenues would prove them wrong on their bearish view.

Shares of Yelp last traded down 11.7% to $19.48.

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