3 Reasons for Yelp’s Recent Rally

Yelp (NYSE: YELP) has been one of the top surging stocks over the past week building off of Friday’s surge where the stock soared +15% to a point where the stock is now up roughly +22% in a little over a week. Not to shabby, especially for a stock that had been slumping as of late. Overall the stock is still down a little around 5% since its IPO but is there room to grow off and be bullish because of this recent rally? Personally, we don’t think so. If anything we think this recent Yelp rally opened up a perfect opportunity for many investors to get out of what has been a relatively subpar investment so far and in our opinion one that has a rather dim future.

So What Was the Cause of Yelp’s +22% Rally?

YELP Chart

Many will probably attribute it to the news that Yelp has struck a deal with Microsoft (NYSE: MSFT) to have review excerpts, photos, and other content appear in Bing Local search results. While this is good news for Yelp as a whole we still think going forward the future is limited due to major flaws in their business model.

Other Reasons for Yelp’s Stock Rally?

YELP Chart

  1. Yelp is Oversold: Prior to last weeks rally, YELP shares have been down nearly +50% from their all-time highs reached in late March. Part of this recent Yelp rally could be related to how oversold YELP had become.
  2. Social Media Stock Rally: Another reason for YELP’s rally could be that investors are finally warming up to social media stocks as a whole. The sector has been hit so hard as of late ever since the epic failure in Facebook’s (NASDAQ: FB) IPO which has had an adverse effect on almost all social media plays such as Zynga (NYSE: ZNGA, Renren (NYSE: RENN), LinkedIn (NYSE: LNKD), and YELP. With Facebook’s stock rising on Friday this could be a good sign for the sector as a whole.
  3. Short Interest: Short interest in YELP currently stands at 2.4 million shares, or 16.3% of the float. It is likely that a part of the rally in YELP is short covering.

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