Yelp vs. Groupon: Which Stock is a Better Buy?

NYSE: YELP | Yelp Inc.  News, Ratings, and Charts

YELP – Most retail merchants witnessed a significant decline in their offline sales at the beginning of the COVID-19 pandemic. But because consumers shifted quickly to shopping online, online marketplaces like Yelp (YELP) and Groupon (GRPN) that connect merchants to consumers thrived. And because the online shopping trend is not expected to reverse even in the post-pandemic world, we think YELP and GRPN should continue to thrive. But let’s find out which of these two stocks is a better buy now.

Yelp Inc. (YELP) and Groupon, Inc. (GRPN) are two of the world’s most well-known companies that operate online marketplaces that connect merchants to consumers. YELP’s platform covers a variety of business categories, including restaurants, shopping, home and local services, beauty and fitness and health.

GRPN operates online local commerce marketplaces worldwide that connect merchants to consumers that offer goods and services at a discount. It offers goods and services primarily in three categories — Local Deals, Groupon Goods and Groupon Getaways.

Both  companies benefited significantly from connecting merchants to consumers when most merchants were suffering due to significant declines in offline sales. Because the online shopping trend is expected to continue even when the COVID-19 pandemic is beaten back we think YELP and GRPN should witness increasing numbers of users on their websites and mobile apps in the coming months.

While YELP has returned 71.2% over the past nine months, GRPN has gained 69.2%. Moreover, in terms of the past-month performance, YELP is a clear winner with 17.3% returns versus GRPN’s 6.3%. But which of these two stocks is a better pick now? Let’s find out.

Latest Movements

According to the Annual 2020 Yelp Economic Average (YEA) report published by YELP on January 26, an economic recovery is emerging. Restaurant and food business owners opened 18,207 restaurants in the U.S.  in the fourth quarter (ended December 31, 2020) and home and professional services have proved to be  resilient and poised for growth. Since January 12, YELP has enabled the users to display whether they observed the enforcement of social distancing and staff mask wearing in  local businesses.

YELP announced in  December that  android users will have even more control over their experience with expanded ways to indicate their personal preferences and tailor YELP’s app based on their dietary preferences, lifestyles, and more in a new, modernized redesign. Also, YELP appointed USAA Chief Brand Officer Tony Wells to its Board of Directors effective October 30, 2020.

On December 2, 2020, GRPN released the results of a  survey report, according to which 70% of those surveyed were found to be even more appreciative of family and friends than they were at the start of the last year. Nearly 70% of those  surveyed also indicated that they’re more determined than ever to give their loved ones  perfect gifts. This attitude among consumers arguably contributed to the company’s revenue. In November GRPN announced the company’s latest Groupon Connect partnership with Xola, which is an online booking, reservation, marketing and tour management platform for in-destination tour and attractions operators.

However, last June  the Schall Law Firm, a national shareholder rights litigation firm, announced its investigation of and potential class action law suit against  GRPN for violations of 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. ’ Securities and Exchange Commission (SEC). The firm alleges that GRPN  made false and misleading statements to the market regarding its sales.

Recent Financial Results

YELP’s net revenue climbed 5.6% sequentially to $233.2 million for the fourth quarter ended December 31, 2020. Its  revenue from its transactions segment increased 37.5% year-over-year, driven primarily by  a higher volume of food take-out and delivery orders, notably through the company’s partnership with GrubHub Inc. (GRUB). Its net income increased 23% year-over-year to $21.09 million and its EPS increased 12.5% year-over-year to $0.27.

GRPN’s revenue from its  service segment for the third quarter ended September 30, 2020 increased 38% sequentially to $155.07 million. However, its total revenue decreased 38.7% year-over-year to $304.02 million, while its  gross profit increased 16.6% sequentially to $160.02 million. The company’s net loss narrowed slightly from $16.69 million in the third quarter of 2019 to $16.27 million in the third quarter of 2020.

So, YELP is in an advantageous position here.

Expected Financial Performance

Analysts expect YELP’s revenue to increase 14.3% this year and 13.3% next year. The company’s EPS is expected to grow 48.5% for the quarter ending June 2021.

In comparison, the market expects GRPN’s revenue to decrease 31.5% in fiscal 2021.And the company’s EPS is expected to grow 85.9% for the quarter ending March 2021.

Profitability

GRPN’s trailing-12-month revenue is much higher than YELP’s $872.93 million. However, YELP is more profitable with a gross profit margin of 93.5% versus GRPN’s 48%. GRPN’s levered free cash flow margin of 6.1% compares favorably with YELP’s 1.2%.

Valuation

In terms of trailing-12-month p/s, YELP is currently trading at 3.08x, which is much more expensive than GRPN, which is currently trading at 0.63x. However, YELP is less expensive both in terms of trailing-12-month p/b (3.21x versus 10.88x), and trailing-12-month p/cash flow (15.41x versus 18.88x).

In terms of trailing-12-month ev/s, YELP’s 2.67x is higher than GRPN’s 0.51x.

POWR Ratings

YELP has an overall rating of B which equates to a Buy in our proprietary POWR Ratings system. However, GRPN has an overall rating of C, which translates to Neutral.

YELP has a B grade for Value, which is in sync with its lower-than-industry trailing-12-month ev/s ratio. However, GRPN’s significantly higher-than-industry trailing-12-month p/b ratio has earned it a C grade  for Value.

YELP’s A grade and GRPN’s C grade or Quality is also consistent with YELP’s much higher gross profit margin than GRPN.

We have also rated both YELP and GRPN for Growth, Momentum, Stability and Sentiment. Get all of YELP’s ratings here. And click here to see the additional POWR Ratings for GRPN.

Of the 66 stock in the D-rated Internet Industry, YELP is ranked #9 while GRPN is ranked #41.

The Winner

We think YELP looks better positioned for growth versus to GRPN based on the factors discussed here. YELP has been able to dominate its niche market amid the coronavirus pandemic. In contrast,  GRPN has not been able to generate income in its last-reported quarter and faces intense competition from market leaders.

Click Here to learn about several other top rated internet stocks.

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YELP shares were trading at $37.52 per share on Friday afternoon, down $0.39 (-1.03%). Year-to-date, YELP has gained 14.85%, versus a 4.63% rise in the benchmark S&P 500 index during the same period.


About the Author: Manisha Chatterjee


Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...


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