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Investment Overview for Yelp (NYSE:YELP)
Share Count Dilution
Our Trefis price estimate for Yelp is based on the diluted share count, which accounts for outstanding stock options, warrants and restricted stock. This means that the Trefis price estimate for Yelp is lower than it would be, if we had used the actual share count instead.
- Yelp's Active Local Business Accounts:
Yelp had at an average nearly 38,000 active local business accounts in 2012. We currently forecast the number of active local business accounts to steadily increase, as it continues to expand aggressively, reaching around 160,000 by the end of our forecast period. However, if Yelp expands at a slower rate than expected and manages to attract only 80,000 businesses to its platform by the end of the forecast period, there could be a downside of about 30% to our Trefis price estimate. Conversely, if Yelp ramps up its expansion and manages to attract more than 170,000 businesses by then, there could be an upside of almost 20% to our Trefis price estimate for Yelp.
- Yelp's Monthly Unique Visitors:
We estimate that Yelp had close to 83 million monthly unique visitors in 2012. Based on Yelp's growth and its estimated growth rate, we forecast around 250 million monthly unique visitors to its website by the end of our forecast period. However, if it fails to attract as many visitors, and has only around 150 million unique visitors by then, there could be a 5% downside to its Trefis price estimate. Conversely, if it is able to attract close to 300 million unique visitors by the end of the forecast period, it could mean a 5% upside to its Trefis price estimate
Marketing and Advertising Expenses
- S&M as a % of Revenue:
We currently expect Yelp's selling and advertising expenses (S&M) to decrease from around 58% in 2012 to 40% by the end of the forecast period. Given the increasing competition in the online business review and recommendations space, Yelp may have to incur increasing amounts of marketing expenses going forward. If its S&M expenses as a percentage of revenues are around 55% by the end of the forecast period, there could be a downside of about 20% to our Trefis price estimate. Conversely, if Yelp is able to clamp down on its S&M expenses, and decrease them to 30%, there could be around 20% upside to our Trefis price estimate
Yelp is a local business search, review and recommendation service that allows consumers to access ratings and read reviews about local hotels, restaurants, salons, dentists and mechanics on their website Yelp.com. These businesses are reviewed and rated by contributors.
Yelp currently has more than 35 million reviews of local businesses in multiple markets, including the United States, Canada and some European countries. The company currently offers information on more than 606,000 businesses in the markets it operates in. It had more than 86 million monthly unique visitors at the end of 2012.
Yelp generates revenue mainly from local business advertising, display advertising and from additional services like Yelp deals, and deals with reservation services like OpenTable. It competes primarily with other online business review services like Google Places, Yahoo Local, Angie's List, CityLocal and Gumtree; display advertising players like Google, Yahoo, Facebook and AOL; and daily deal sites like Groupon and LivingSocial.
Local Advertising is Yelp's most valuable business
Yelp generates a major portion of its revenue from local advertising. We estimate that around 70% of its overall revenue in 2013 will be generated through local advertising. Its local advertising platform leverages the power of inbound marketing, which leads to a higher customer conversion rate than traditional display advertising. We expect its local advertising revenue to grow in the coming years, as it expands in multiple international markets.
Huge repository of local business reviews and large user base
Yelp has the largest database of local businesses in the markets that it operates in, especially in the United States. It has more than 35 million user reviews of around 606,000 local businesses. Due to its large repository of user generated information, it attracts more than 85 million monthly unique visitors every month, which makes it a very attractive advertising and marketing platform for local businesses who are trying to attract new customers.
Proven expansion and market development strategy
Yelp has a proven market development strategy which it uses to expand into new markets in the United States, Canada and Europe. It plans to expand globally into multiple countries across the world - to achieve which, it can use its tried and tested techniques, and its experienced sales force to attract new users and businesses, and ramp up quickly even in new markets. It expanded operations to 20 countries in 2012, and plans to continue its rapid expansion spree going forward.
Large community and network effects
Yelp has one of the largest communities of active contributors which write detailed reviews about local businesses. Its community has contributed more than 25 million reviews to date, and continues to generate more than 25,000 local business reviews every day. Its large repository of reviews attracts more than 85 million unique visitors every month, which makes it the perfect advertising platform for local businesses looking to gain new customers. This, in turn helps Yelp generate increasing amounts of revenue from local and display advertising, as well as offerings like Yelp Deals and hotel reservations.
Online advertising market growing rapidly
The online advertising market has been growing rapidly, fueled by the increasing use of the Internet by consumers on mobile devices, notebooks and tablets. As more consumers search for products and services online, local businesses are shifting their ad spending from traditional media to online. eMarketer research estimates online ad spending in 2011 to be $31.3 billion, which is expected to reach nearly $50 billion by 2015.
The online advertising market is currently dominated by Google, Facebook, Yahoo and AOL. If Yelp is able to capture even a tiny portion of the total market, it could significantly increase its revenues in the coming years.
More businesses interested in local targeting of ads
The increasing popularity of location based services like Foursquare and localized daily deal sites like Groupon and LivingSocial has led to more advertisers demanding better location based targeting features and metrics to ensure that their ads reach a relevant audience.
The rise in local advertising could significantly help Yelp's top line growth in the coming years, as it specializes in targeted advertising for local businesses, and has a huge intent-driven user base, which is searching specifically for products, services and businesses in their locality.
Increasing popularity of daily deals
The daily deal space has exploded in the last couple of years. Though Groupon and LivingSocial currently dominate the market, the daily deal business is a natural fit for Yelp, which already has a huge repository of local business looking to promote themselves on Yelp's platform. Revenue from Yelp Deals could generate an increasing portion of Yelp's overall revenue in the coming years.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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