Why I Love Yelp
NEW YORK (TheStreet) -- Yelp
I am long the company for several reasons:
1. Its growth is coming in bunches:
As of the end of last year there were 71 Yelp markets. The company added 22 last year and 22 the year before after adding only seven in 2009. There's a delayed effect in how a new market contributes to revenue -- in its S-1, Yelp reveals that markets founded in 2005-06 had average local ad revenues last year of $5.8 million, while the 2007-08 cohort had average sales of $1.1 million and the 2009-10 cohort had average sales of $143,000. That means that, between the three- and five-year mark post-launch, there's an explosion of revenue per market from almost $1 million per year in ad revenue to $6 million.
If you model it out, Yelp seems like a lock to do $113 million in local advertising this year. For the past two years, local has represented about 70% of their overall revenue (with brand ads and other services such as Yelp Deals -- a competitor to Groupon
If you model out next year, Yelp seems on track to do $218 million in local ads next year and total revenues of $312 million. That's far ahead of the analysts' consensus of $177 million.
2. It is building a small-business social graph in which the data it owns are worth more than the ad revenue:
More important to me than the ad revenues Yelp can accumulate to me are the data. In the end, this information is the much more valuable part of its business and what will power its revenues three to five years from now. This data is going to power how ads and deals get served to consumers through mobile devices and smart TVs.
3. In the meantime, the ad revenue is stable:
Until the next generation of ad revenue kicks in, Yelp investors have to rely on their local ads, brand ads and other sources. Luckily, as per Point 1, that's a growing business. I assume we will see minimum 22 markets open each year from now on, and probably higher than that, to ensure future growth.
4. Yelp will do a good job exceeding revenue expectations in the next 18 months:
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This also goes back to Point 1. If you go by its cohort growth data, Yelp's table is set for them to exceed analysts' expectations by a country mile. Generally, good things happen to stock prices when that occurs, although one risk is that the rapid shift by users to mobile changes the monetization dynamics of the growth process Yelp described. That's fairly reasonable. Luckily, the revenue estimates in Point 1 are so far ahead of expectations there appears to be ample wiggle room.
5. They've got a fat price-to-revenue multiple tied to that revenue growth.
It's 16 times trailing. That's high, although it might get higher as Yelp's revenues scale up and investors see even more value in the network it's building. LinkedIn
6. They're an attractive M&A takeout candidate.
At the moment, Yelp has a $1.3 billion market cap. If it did get to $320 million in revenues for 2013 and a LinkedIn-type price-to-sales ratio, you're talking about a company with a $6.7 billion market cap. Now, $1.3 billion -- even with a hefty premium slapped on it -- is a much more digestible takeout target. And there would be many willing buyers -- including Yahoo!
7. It was launched in the middle of the social era, but its service lends itself to mobile.
I wrote recently about the differences between companies founded in the social era and those founded in the mobile era. The older generation of social companies have difficulties successfully moving their social businesses into the mobile world, just as older Web companies had problems moving into the social age. Yelp was clearly a social company, founded in 2005, just a year after Facebook, but Yelp is lucky in that it is a service that lends itself well to the mobile world; it was quick to jump into the mobile space with iPhone and iPad apps. It has been mentioned prominently by Steve Jobs in Apple keynotes discussing how people using mobile would rather search for information in Yelp than Google it.
8. You are getting a free call option on their move to in-car navigation systems and iTV ads.
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As I implied in Point 2, I think the best is yet to come for Yelp. It's not a new way of doing the Yellow Pages; I see it as a new way of doing ads in the mobile world and on TV. As we get more and more Internet-connected navigation systems in cars, it's a natural they would be tied into Yelp localized listings. Interesting partnerships could be in the works with major car makers and Sirius
The risks to Yelp are:
1. Can it monetize its markets as well on mobile devices as on the Web?
2. What if Google turns off the firehose of traffic to them? Could Google tweak its algorithm result in far less referral traffic, as they did with Demand Media
3. Yelp can't monetize its ads and becomes another Patch local ad biz model bust. AOL's
The bottom line is that I see Yelp as a category-killer in the local business market and it's perfectly well situated to benefit from the move to mobile and iTV. And we haven't even discussed how it could eventually overtake Groupon and other pure-play group-buying businesses.