Yelp Can Still Rate Itself 4 Stars, Despite a Few Bad Reviews

Yelp Inc. Illustrations Ahead of Earnings Figures
Andrew Harrer/Bloomberg/Getty Images
A growing number of merchants and customers are finding reasons to complain about Yelp (YELP), but its fan base is apparently growing even faster. The local rating review site operator posted another blowout quarterly report on Wednesday night.

Net revenue soared 66 percent to $76.4 million, just ahead of the $75.1 million that analysts were expecting. Yelp's still losing money, but its quarterly deficit was cut in half to 4 cents a share. Wall Street was expecting more red ink, and that's a good thing. This is only the second time over the past five quarters that Yelp has bested analyst bottom-line targets.

Yelp's rocking, despite the criticism over its alleged business practices.

Success Attracts Enemies

But it's critics didn't take a break to let Yelp enjoy those upbeat numbers. Just an hour after it reported quarterly results -- while it was halfway through its conference call, in fact -- a San Diego law firm issued a press release of its own. Johnson & Weaver, which calls itself a shareholder rights specialist, is launching an investigation into Yelp's practices. The goal is to verify if Yelp is requiring business customers to pay in order to suppress negative reviews.

The accusation isn't new, stemming from a recent Federal Trade Commission revelation that it has received more than 2,000 complaints from merchants. The gripes suggest that companies' refusal to become premium Yelp businesses accounts resulted in the site featuring negative reviews about them.

This isn't the first class action lawsuit trying to strike back at Yelp. A pair of suits tried to get off the ground a few weeks earlier.

Yelp denies the allegations, though it doesn't dispute that its premium members get a leg up on the competition. That's the nature of advertising. Companies bid for top slots on the leading search engines, so why can't a free review site let local businesses pay for better exposure?

Visitors and merchants continue to flock to Yelp in record numbers. There are now 57 million cumulative reviews on the site, 46 percent ahead of where it was a year earlier. Average monthly unique visitors are up 30 percent to 132 million. It's great to see reviews growing faster than usage. It's a testament to Yelp's stickiness and engagement among folks looking for a place to eat or a spa to check out.

Don't Bet Against the Networking Effect

Businesses can't ignore Yelp's growing captive audience, and that end of the equation is growing faster. The number of active local business accounts clocked in at 74,000 at the end of March, a 65 percent improvement over the past year.

That's called the networking effect. Customers go where the merchants are, and merchants -- in turn -- go to where the customers can be found. The reason that eBay (EBAY) became so popular as a marketplace even though there were plenty of free or nearly free alternatives is that it had the networking effect in its favor.

This doesn't mean that Yelp can ignore the rising dissent from a small number of local businesses. Yelp's model relies on users populating its website with content, and the last thing that it needs is for reviewers to turn on the site. After all, they aren't getting paid to write those comments. The more active and prolific reviewers do get invited to restaurant and bar openings and outings, but even they may question their loyalty if their words are being used to coerce merchants to pony up as sponsors.

At this point, the claims are limited to accusations, and Yelp has countered that its sales team doesn't have access to back-end administrative privileges. It has also beefed up its filtering system to weed out bogus reviews. For now, that's been more than enough to keep consumers coming and contributing.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends eBay and Yelp. The Motley Fool owns shares of eBay. Try any of our newsletter services free for 30 days.

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Markus Magness

This is a fairly biased article. A stock-pumper for certain.

"The gripes suggest that companies' refusal to become premium Yelp businesses accounts resulted in the site featuring negative reviews about them."

No, Yelp will do a number of things to your account. Their objective is to hurt your rating so you cannot benefit from their services...once you declare you don't care for Yelp's business. They will take down your good reviews, leaving your bad reviews to hurt your rating. This is their favorite thing to do. If you have no reviews they will remove your uploaded photos.
This always happens within days of declining an advertising package from a Yelp salesman. This has happened to me 3 times.

"" Companies bid for top slots on the leading search engines, so why can't a free review site let local businesses pay for better exposure?""

You make them sound so innocent. These business' have no choice, they cannot opt out. They cannot escape from Yelp. Yelp will never let you go, even after you sue them in court.

Yelp's illegal practices would be reveled if their emails were subpoenaed. Just need the feds to get in on the action. They can ask me and I will offer proof of what they are doing. Most businesses have it in the form of their clients testimonials. But thanks to people like this author the naive consumer continues to believe Yelp.

May 03 2014 at 12:41 PM Report abuse +1 rate up rate down Reply
Bobby Sood

How can you defend Yelp?

Maybe one day if they hurt your business and livelihood, then you'll understand the frustration and pain.


May 02 2014 at 3:24 PM Report abuse +1 rate up rate down Reply
No Victim

Any skilled chartist will tell you that Yelp is gonna completely tank. It is a pure momentum, no earnings stock which has fallen below both its 40 and 20 week moving average at a time when all the pros are rotating away towards value. Study the charts and realize the latest uptick is a set up for a bearish crossover.

Any HUMAN BEING, with a heart, some courage and a brain will also tell ya that Yelp is a bad company.

YELP is a known extortion scheme whereby businesses who decline to advertise wind up with their positive reviews filtered and their negative reviews made prominent. A cadre of so called elite Yelpers (chronically unemployed losers bought off with swag and free booze) are Yelps hired guns who do the dirty work of defaming small businesses for them and shilling for advertisers. IF you read this Class Action Complaint you will read the testimony of one such "Elite Yelper" Lily Jeung, who outlines how the extortion scheme works, how she was fired for writing a negative review on a big money advertiser and how it all comes down from Jeremy Stoppelman.
Pay close attention to Class Action Complaints #47-58
Yelp relies on small business advertising for 60% of its revenue yet Yelps advertising rates clearly point to extortion. The industry standard is 60 cents per 1000 page views. Yelp charges $600! Why would anyone who has been publicly defamed choose to advertise with a company who has done them harm? The answer, to heed to the extortion. However, speak to anyone who has advertised and they will all share their regrets; no return on investment, zero customer service and only increased extortion without an exit.
Back to business...
It's valuation and P/E ratio is absurd and the stock is now tanking.The thousands of FTC complaints, class action lawsuits and complaints to states attornies general are only the tip of the iceberg. Look out below!

May 02 2014 at 12:09 PM Report abuse +2 rate up rate down Reply