Why Yelp Inc (NYSE:YELP) Is Still Worth Attention
Yelp Inc (NYSE:YELP) recently reported a mixed quarter in which earnings missed expectations but topline number easily topped the estimate. But the results restored the question about whether Yelp has a bright future or it had become a spent force.
This Yelp analysis article examines the company’s opportunities and challenges to enable you make an informed investment decision regarding the stock. But first is a recap of last quarter earnings.
Yelp Inc (NYSE:YELP) reported 1Q2016 EPS loss of $0.20, wider than EPS loss of $0.15 that analysts expected on the average. However, revenue of $158.6 million handily beat the consensus estimate of $155.6 million.
2Q2016 and full-year 2016 outlook
For the current quarter (2Q2016), Yelp is looking for revenue in the band of $167 to $171 million. Analysts on the average are projecting revenue of $167.5 million. For the full-year 2016, Yelp is hoping to generate revenue of $690 to $702 million. The company generated revenue of $550 million in 2015.
The chart below shows Yelp’s revenue for the last five quarters:
What’s interesting about Yelp?
- Large addressable market
Local advertising spending in 2014 was $137 billion and nearly 23% of $31 billion of local ad spending was on digital channels of which Yelp Inc (NYSE:YELP) is a provider. It is estimated that local digital advertising will account for nearly 35% of total local ad spending in 2019.
Yelp stands to benefit from the anticipated robust growth of local digital advertising market thanks largely to recent changes in its business model. To attract and retain advertisers, Yelp is promoting performance-based advertising over display advertising. With performance-based advertising model, advertisers are able to maximum their ROI and that encourages them to stick to the platform.
But is there evidence that Yelp’s shift in business model is working? The shift from display advertising to local advertising appears to be paying off as the company reported its local advertising accounts increased 40% YoY to about 121,000 in 1Q2016. At the same time, local advertising revenue rose 40% YoY to $138.1 million, a sign that the shift in advertising model is working for the company.
However, it is worth pointing out that the opportunity is still huge for Yelp in local advertising business because the shift in business model is still in its infancy.
- Strong mobile presence
Yelp Inc (NYSE:YELP)’s push to mobile appears to be paying off. The company reported that nearly 70% of the page views in 1Q2016 were on mobile. Additionally mobile engagement was at least 10 times Web engagement based on the number of pages viewed by device.
Overall engagement on Yelp is also strengthening as the company reported that reviews posted in 1Q2016 rose 31% over the corresponding quarter in 2015. According to Yelp’s CEO, Jeremy Stoppelman, mobile users are submitting reviews every two seconds.
- Expansion to food delivery
Yelp Inc (NYSE:YELP) is in the process of diversifying its revenue streams. The company acquired Eat24 to enable it expand into food delivery industry as the company seeks a presence in more online transaction verticals. Because of Eat24 acquisition, Yelp’s transaction revenue in 1Q2016 increased sharply to $14.5 million from $6.6 million in 1Q2015.
Expansion into food delivery business also has an element of enabling Yelp to cut reliance on advertising revenue, which current forms the bulk of its income.
- Product innovation
Aware of the growing competition in its industry, Yelp Inc (NYSE:YELP) seems to be betting on product innovation to enable it different its offerings and mitigate the impact of competition. In 2015, the company funneled $116 million to R&D compared to $75 million in the previous year. Investing in R&D is important for Yelp’s continued growth and survival in a rapidly changing and intensely competitive business environment.
- Ambitious revenue growth target
Yelp targets to hit revenue of $1 billion in 2017. Looking at how Yelp’s mobile business is expanding rapidly and how its performance-based local advertising model is gaining traction, you get the impression that $1 billion in annual revenue is attainable.
However, Yelp will have to rapidly grow its self-service (performance-based) advertising business and take share abroad to accelerate revenue growth to enable it hit the $1 billion target in 2017.
What’s worrying about Yelp?
- Advertiser churn is a threat to the growth of Yelp
To combat the problem of advertiser churn, Yelp Inc (NYSE:YELP) introduced self-service advertising product. The product gives advertisers more flexibility in the sense that they can turn ads on and off any time. Additionally, the self-service product is cheaper than Yelp’s legacy subscription advertising. With lower cost nature of self-service should enable advertisers to see better returns on investment and stay longer on Yelp’s platform.
- Tough competition from established, deep-pocket rivals
Although Yelp has transformed itself into a formidable brand in the online review space, it hasn’t completely escaped crippling competition. While smaller rivals may struggle to build a review force that can rival Yelp, the likes of Alphabet Inc (NASDAQ:GOOG)’s Google and Facebook Inc (NASDAQ:FB) have the numbers and financial resources to pose a serious threat to Yelp’s survival. In the recent times, the two companies and Groupon Inc (NASDAQ:GRPN) have tended to encourage users to leave product reviews on their platforms and given their deep pockets and user base, they can easily encroach onto Yelp’s territory and limit its future growth.
- Reliance on Google traffic
Although Yelp Inc (NYSE:YELP) gets traffic from different sources, nearly half of its traffic comes from Google. While that may seem to be a good thing at a first glance because organic traffic is unpaid for, reliance on search engines like Google for traffic carries a set of risks. Search engines update their algorithms frequently and those updates affect how pages are ranked. If Google changes its algorithms in a way that pushes Yelp ranking down, the company could suffer a massive traffic loss.
Additionally, the fact that Google has its own review product means that Yelp is relying on a competitor for traffic and that can pose great uncertainty to its business.
- Uncertain international market
Yelp is struggling to generate meaningful gains from its international operations. The company entered its first global market about six years ago and today operates in more than 31 countries outside the domestic U.S. market. But the tragedy is that only a paltry 2% of Yelp’s revenue comes from abroad. With that, you see that the company has a long runway to cover and much heavy-lifting to do to accelerate international growth, especially if it is to hit its revenue target of $1 billion in 2017. But driving that growth will take time and come at a price in the form of massive marketing spending that will only eat into margins and profits.
- Yelp is spending to increase sales force
Yelp Inc (NYSE:YELP) tripled its marketing budget to $30 million in 2015 to try and bring more visitors to its site. The company also announced plans to boost its sales force by 40%. While these spending are justified, they have short-term adverse implication on the bottom-line.
Yelp Inc (NYSE:YELP) has a viable business model, but attaining long-term prosperity will take time and require belt-tightening.
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