Yelp ads deemed overpriced, analyst predicts slowdown in growth

Yelp Inc. has been falling in and out of favor with small-business owners for years, and a recent report by Pacific Crest Securities lends it no favors with one restaurant owner calling the Yelp team “annoyingly persistent” and data pointing to its too-expensive ads.

The analysis, which follows a deep-dive report conducted by the brokerage earlier this month on the restaurant industry and its use of technology, shows that taking out ads on the online reviews site is viewed as too expensive by many small businesses and independent restaurants.

“Annoying persistent sales team at Yelp,” one unidentified restaurant owner said in the report, according to Pacific Crest. “We are not confident that spending money on advertising with Yelp will have any more impact than a strong review.”

On average, independent restaurant operators spend roughly $7,200 a year on local advertising, compared with the $4,600 in revenue Yelp YELP, +1.32%  reports on average per local account, according to Pacific Crest’s analysis of restaurant profit and loss statements.

Yelp, whose local ads accounted for 83% of total revenue in its most recent quarter, reported local revenue of $98.6 billion in the first quarter, marking the fourth straight quarter of revenue deceleration in the local ads group.

Restaurants account for roughly 15% of Yelp’s total revenue, and Pacific Crest, which reiterated a sector weight rating on Yelp’s stock on Tuesday, said it expects “meaningful growth deceleration” to continue.

“We are seeing further signs that Yelp is too expensive for many independent restaurants and local businesses,” said Pacific Crest analyst Evan Wilson. “If Yelp ads don’t drive a meaningful uplift in sales, or even if it’s just difficult to determine the ROI of the spending, it is a difficult expense to continue to justify.”

Larger chain restaurants were also weary of Yelp ads, citing the large mix of negative reviews on the site.

While shares of Yelp were up 1% to $42.90 on Tuesday afternoon, the stock has fallen 44% over the last 12 months, including falling 10% over the last three.

Yelp did not immediately respond to a request for comment.

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