3 Reasons to Avoid the Yelp Stock Spike

Yelp stock skyrocketed on Monday, rising more than 6%. The company’s stock, a relatively dangerous stock for investors, was boosted prematurely on breaking news that inflated prices.

Investors should avoid Yelp, at least for the next few weeks, because:

1.     David Einhorn’s Announcement Inflated Prices

A breaking announcement on Monday led to Yelp’s rally. Green Capital’s David Einhorn announced that his company purchased Yelp stock and caused a frenzy amongst investors. The stock maintained much of its gain on Tuesday and is still above $22 a share on Wednesday morning.

The news from Einhorn was a shocker for most investors that avoid Yelp because it continually underperforms.

Einhorn’s company is one that has the capital to withstand major stock fluctuations. The majority of investors cannot withstand losses for years due to lower capital. Novice and even experienced investors are taking a gamble when buying Yelp stock on the back of the announcement.

2.     Yelp is Set to Release Earnings on May 5

Yelp (YELP) is slated to release the company’s earnings report on May 5. The report is expected to show revenue of $155.57 million with an EPS of $0.16. Seasoned investors know that before and after earnings reports you should not buy into stock. The timing is simply too dangerous and you stand to make substantial gains or suffer substantial losses.

Trends of rising after reports often lead to buying when prices are inflated, too.

Buying Yelp before the company’s earnings report is a higher risk for investors. It is a risk that Einhorn can afford, but many smaller investors cannot.

3.     Billion Dollar Bully is Being Released Soon

Billion Dollar Bully is a documentary that is expected to hurt the company’s stock and revitalize investor concerns. The documentary takes a look at Yelp and its practice of forcing business owners to purchase ads.

Purchasing ads allows the company to gain positive reviews.

Thousands of complaints have been filed against the company from business owners that allege the company offered positive reviews to them for buying ad space. Concerns over the company’s fraudulent behavior were laid to rest following an investigation from the FTC that found that the company was not guilty.

The closed case may be reopened and raise further concerns for Yelp.

Yelp is valued at $1.7 billion, and if the company does post positive earnings and Billion Dollar Bully does not reignite concerns over the company’s reviews and information, Yelp may be a reasonable option in the future.

A sensible move for investors is to allow for the earnings reports and hype from Einhorn and Billion Dollar Bully to pass before going on a buying spree. If the FTC does reopen its case against Yelp, the company’s stock is all but certain to drop rapidly as a result.

However, if Yelp is not re-investigated and tomorrow’s earnings report is positive, Yelp may be a smart long-term investment.

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Daniel Simmons