Why Yelp, Inc. Stock Dropped Today

What happened

Shares of Yelp Inc. (NYSE: YELP) fell 14% on Thursday after the local business-review specialist announced strong fourth-quarter 2017 results and disappointing forward earnings guidance.

More specifically, Yelp's revenue climbed 12% year over year, to $218.2 million, above guidance provided last quarter for a range of $211 million to $216 million. Trending toward the bottom line, Yelp's adjusted EBITDA was $41.6 million, or near the high end of guidance for $39 million to $42 million. That translated to adjusted net income of $16.8 million, or $0.19 per diluted share, above investors' expectations for adjusted earnings of $0.05 per share.

So what

Advertising revenue continued to represent the bulk of Yelp's top line, growing 18% year over year, to $208.4 million. Meanwhile, transactions revenue fell nearly 70%, to $5.2 million, albeit primarily driven by the absence of sales from Eat24, which Yelp sold to GrubHub last quarter.

"We finished 2017 strong with rising growth in new advertiser acquisition and continued improvements in revenue retention from the prior year," added Yelp co-founder and CEO, Jeremy Stoppelman. "In 2018, we are focused on increasing consumer usage through deepening our product experience in the Restaurants category and attracting advertisers through expanding sales channels and increased ad product flexibility."

Now what

In the first quarter of 2018, Yelp expects revenue in the range of $218 million to $221 million -- the midpoint of which is slightly above Wall Street's consensus models -- with adjusted EBITDA of $29 million to $32 million. For perspective -- and this helps explain today's drop -- the latter range equates to an adjusted EBITDA margin of just under 14%, marking a sharp decline from Yelp's roughly 19% EBITDA margin in the fourth quarter.

During the subsequent conference call, Yelp management explained that the company plans to make strategic investments in its Yelp Reservations, Nowait, and Yelp Wi-Fi initiatives, with the aim of boosting user engagement, transaction activity, and subscription revenue.

"These strategic investments are expected to initially dampen adjusted EBITDA growth and margin expansion in 2018," elaborated Yelp CFO Lanny Baker, "while solidifying our competitive position and setting up stronger financial growth in the long term."

That's fair enough, as it's hardly uncommon for fast-growing companies to sacrifice near-term profitability in the name of taking market share and driving growth. However, it's obvious that the market is skeptical for Yelp's plan of action, and it's no surprise to see the stock pulling back today in response.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Grubhub and Yelp. The Motley Fool has a disclosure policy.