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Yelp: You’ll Be Sorry You Missed It

Yelp (YELP) acts as a city guide for people, allowing them to make educated, appropriate decisions regarding various businesses in their area, all through the website Today the company has expanded its services in most of the North American and European markets and is looking reach consumers in many additional markets. The company’s stock was listed on the New York stock exchange in March 2012 and since then has traded in the range of $15-$40 per share.

Industry overview
The world is witnessing a trend where more advertisers are going online. Last year, local advertisement was a $96 billion market, of which online advertisement contributed about $19.9 million. This year the local advertising market will reach to $101 billion, and the online segment will make up approximately $23 billion. Therefore, out of an additional $5 billion in spending this year, more than 60% is attributable to online advertisements. One of the primary contributors to this increase is the mobile advertising platform, which will to contribute nearly 88% of total online advertisements by 2016 as compared to just 6.3% now.

This article will explain the change in trend towards online advertisements and whether Yelp’s current stock price justifies its true potential.

The way towards growth

I think the following points will lead to Yelp’s growth:

1) Yellow pages losing out to online advertisers
The print directory segment of the U.S. yellow pages market shows a path, which can only improve online advertiser’s revenue. As there has been a shift towards online advertisements, the print directory segment will lose its market share to online advertisers in the future. Therefore, this currently $6.9 billion segment is expected to decline at 11% CAGR through 2015. This decline made me think; what part of this opportunity can be captured by Yelp?

A survey of 500 U.S. citizens regarding the U.S. online advertising market sheds light on Yelp’s opportunity. The survey showed increasing U.S. consumer awareness about Yelp, and it highlighted that almost 16% of respondents used Yelp for their local search and the majority wrote reviews on Yelp’s website. Additionally, the majority of Yelp’s users were in the 18-29 age group as compared to the yellow pages whose users distribution is skewed towards the older age group. Yelp’s demographic advantage will lead to more reviews being written on its website and therefore increasing its customers base.

2) The model of monetization of free
The company has chosen a free subscription model. Under this model, the reviews posted on the company’s website can be read free of cost. For businesses where a majority of the revenue is earned by selling online reviews, it becomes important for the company to attract audiences to its site and let them understand the services and products provided by different businesses. In the first quarter of 2013, the company reached a whopping 39 million written reviews on its website. Further, a recent study indicated that companies that advertise on Yelp saw an average annual revenue increase of $23,000. I believe this will increase over time and will attract more clients to Yelp’s business.

Revenue from different segment will be as follows:

1) Mobile penetration- A key revenue driver for brand ads segment
High penetration through mobile devices and the increasing use of smartphone devices led Yelp to focus on its brand ads segment. This segment contributes 11% of Yelp’s value and registered growth of 16% year-over-year last year, attributed to the increase in the number of mobile visitors to its website. In the current year, average monthly unique visitor count will reach 120 million, from 86 million last year, and approximately 30% will be mobile visitors. With the smartphone devices outpacing the use of personal computers, I expect the estimated contribution from mobile users to be on the higher side.

Even if I consider the contribution from the mobile users to be 30% and an estimate of 300 pages viewed per user per month, the total monthly views by unique mobile users turns out to be 2.19 billion pages. The company currently charges advertisers $1.50 per thousand impressions. With this, the company can generate additional revenue of $3.3 million, which will lead the overall revenue from this segment to $28.5 million this year up from $20.6 million in 2012.

Note: If the contribution from mobile users turns out to be more than 30%, there will be a further upside potential for this segment.

2) Local advertising
Last year, Yelp had 38,000 active business accounts and generated an average revenue per account, or ARPA, of approximately $2,800. The number of active business accounts is expected to increase further as Yelp has been aggressively expanding its services in different geographies. Presently, Yelp has over 35 million written reviews, covering more than 606,000 businesses. With its existing marketing strategy and sales force, the company has been looking to explore new markets in the U.S., Canada, and Europe. It expanded its operations in 20 countries in 2012 and will continue the pace in the current year as well. Therefore, I expect Yelp’s active business accounts to increase rapidly, registering an additional 32,000 accounts by the end of the current year. However, we may see a linear decline in the ARPA as we move forward due to increased attention on boosting its customer base. However, for the current year the ARPA will remain around $2,600-$2,800. Therefore, if the company is able to register around 70,000 business accounts, we will see the local advertising segment contribute $189 million in revenue in the current year.

3) Partnerships and other services
Additionally, Yelp offers a platform for different business houses to offer their daily deals to consumers in the form of promotional offers and discounts. These are generally weekend offers and tend to attract more visitors, especially with the company’s user base consisting of a younger generation. Moreover, this segment also allows Yelp’s partners, OpenTable and Orbitz, to offer their services to consumers such as hotel reservations and airline ticket bookings.

The revenue from this segment jumped to $7.13 million in 2012 from just $0.32 million in 2009 and will generate revenue of $8.2 million in the current year, which will continue its growth momentum.


Last year, the contributions from Yelp’s different segments were:

Local advertising —– 78%
Brand ads advertising —–10%
Net cash —– 8%
Partnerships and Other services —- 4%

Note: The above mentioned percentages are rounded off.

In the current year, I don’t foresee any major change in the contribution pattern towards the company’s value.

The company should generate revenue of approximately $225 million in the current year. With 64.4 million equity shares outstanding, Yelp’s revenue per share will be almost $3.50.

Further, Yelp will have an estimated $105 million in cash and cash equivalents at the end of the current year, and therefore cash per equity shareholders will be $1.63.

Based on the above calculations, the company’s stock price by the end of 2013 should reach to $49.

(average sales per share * price to sales multiple) x 0.92 + cash per share * 0.08

= (3.50 * 15.20) x .92 + 1.63 * .08

= $49.


1) The price to sales multiple based on the price for which the stock has traded in the trailing 12 months.

2) The above price is calculated on a weighted average basis.

Stock price movement

Yelp’s stock price has been rising steadily since the beginning of 2013. Initially, when the company was listed in 2012, it did experience some volatility. However, because of its future growth potential, the investors have shown confidence in the company’s business model, and I expect the momentum to continue in 2013. As per the company’s value that I calculated above, I expect the stock price to reach $49 by the end of 2013.


The growing trend towards online advertisements will certainly provide a platform for Yelp to increase its revenue in the future. However, the larger question remaining is how much of the online advertisement market share can Yelp capture when competing with giants like Google (GOOG), Facebook (FB), and others. Based on the survey that I cited above, it seems that Yelp is trying hard to increase consumer awareness and to expand in additional markets. In addition, the declining share of yellow pages’ print directory segment will prove beneficial to Yelp in the days to come.

Further, if Yelp is able to add more than 32,000 active business accounts in the local advertising segment in the current year, we can see upside potential for the company increases. Therefore, the expected share price of $49 could increase further by the end of 2013.

The stock is a strong “buy” and, even if bought now, can generate a holding period return of approximately 31% by the end of the current year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)


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Mystic Maggie

All of the Mystic Maggie Posts are RSS Reader Feeds from around the web. All copyright remains with the original publisher. No copyright is claimed or intended. Where supplied, links back to the original article are included.

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