We recently upgraded our price estimate for Yelp (NYSE:YELP) from $19 to $44, based on the company’s continued strong growth across its business lines. We have substantially increased our forecast for the number of active business accounts that Yelp can target, the number of unique visitors, as well as the revenues it derives from deal businesses. While we have argued our concern about Yelp’s market price being too high, there is strong evidence that the company’s growth momentum may continue in the near term. Yelp has introduced a host of services that will bolster its revenues going ahead.
Despite our substantial upgrade, our price estimate stands 35% below the current market price. There are certain risks that need to be considered and a slowdown in growth can impact the stock significantly. Additionally, as the company expands to new markets, its average revenue per active business will likely decline going forward.
Drivers For Growth
Growth In Active Business Accounts To Boost Local Ads Division: The local ads business currently accounts for around 80% of Yelps’s stock value and is its biggest revenue source. The local ads revenue for the company has tripled in the last two years from $48 million in 2010 to $138 million in 2012.
In last few years, active business accounts have grown at a rapid rate, from 9,000 in 2010 to over 40,000 in 2012. In the third quarter, Yelp reported 60% year-over-year growth in active business accounts to 57,200. The primary reasons for growth in this driver are Yelp’s international expansion efforts and the increase in cumulative reviews on the Yelp site for existing markets, which increases its appeal to advertisers and users alike. While Yelp continues to expand its presence in the U.S., it has also increased its reach to over 23 countries. We expect that the number of active business accounts will continue to grow as Yelp expands. Additionally, according to Yelp, mature markets (regions where Yelp has been operational for more than 5 years) witness higher conversion rates from claimed businesses to active businesses. This will further fuel the growth in active business accounts.
Moreover, newly launched services such as call to action and the delivery platform add value to Yelp’s existing listed business as these businesses can sell their products directly to users and easily quantify the revenue opportunity generated through Yelp. As the perceived value added by advertising with Yelp increases, we expect more of the 1.3 million unpaid accounts will sign up for Yelp’s paid services.  According to a survey conducted by Nielsen, four out of five Yelp users say they visit the site when preparing to spend money.  Consequently we expect the number of active business account to rise even more than we had previously forecast. We have increased our projection for the number of active business account from 181,000 to 380,000 by the end of our forecast period. This translates into a $14-per-share increase in our stock price estimate. However, if the active business accounts were to increase to 500,000 by the end of our forecast period, our stock price estimate for Yelp can increase by 25%. Conversely, if growth were to slowdown to 200,000 by the end of our forecast period, our price estimate for Yelp can decline by 25%. We invite readers to try their own assumptions in the model.
Deals Revenues To Improve: Yelp’s Deal, Partnership and Other services (DPO) division has been slow to take off. Currently, Yelp generates revenue from this division through any transaction that might occur on its website. Yelp’s deals platform allows merchants to promote themselves, and offer discounted goods and services, on a real-time basis to consumers directly on Yelp’s website and mobile app. Yelp charges a fee on Yelp Deals for acting as an agent in these transactions.
Yelp’s DPO division revenues grew by 270% in 2011 to $7 million, from $1.93 million in 2010, primarily due to an increase in revenues from Yelp Deals and partnerships, as it forged partnerships with OpenTable and Orbitz. However, the pace of revenue growth has slowed down since 2012, as the competition from daily deal service providers such as Groupon and LivingSocial, etc. increased.
Recently, Yelp launched new initiatives, such as the call to action and the delivery platform, to close the loop between discovering a business on Yelp and making a purchase from that business. We believe that the newly launched services will drive revenues at the DPO division going ahead. As users browse businesses, they can now place delivery orders with the businesses directly. This platform not only streamlines the user experience with easy shopping on Yelp’s properties, but also supplements Yelp’s DPO revenues through the transaction fee that Yelp charges for any orders placed on its website. For more on how these services will bolster DPO division revenues, please read our article here.
We estimate that the revenues for DPO division will grow to $100 million by the end of our forecast period as Yelp’s delivery platform, product portfolio and transaction services gain traction. This translates into $2 per share increase to our stock price estimate. However, if revenues from these services were to increase to only $50 million by the end of our forecast period, our stock price estimate can decline by 10%.
Mobile Search To Bolster Brand Ads Division: Brand advertising is currently Yelp’s third largest source of revenue and makes up 6% of our stock price estimate. Yelp competes with Google, Yahoo, Facebook and AOL for display ads revenue. Unique visitors are the primary driver for this division. In Q3, monthly unique visitors grew to 117 million and 33% of this group (~13 million monthly unique mobile users) used mobile devices for accessing Yelp’s services. The growing number of consumers searching for local businesses online constitutes Yelp’s existing market, and in addition to company’s global expansion plans, we believe adoption of Yelp’s mobile platform will drive this growth in unique visitors on the Yelp site.
Currently, Yelp has an installed base of approximately 11 million smart devices and nearly 60% of all Yelp’s searches were via mobile. Recently, the company launched display ads for its mobile platform, and we expect mobile platform to become a major revenue driver for Yelp’s brand ads division. As a result, Yelp reported growth in ads impression from mobile devices, which now constitutes 46% of all ads served.
Based on Yelp’s growth in unique visitors and increasing use of Yelp’s mobile platform, we have increased our forecast for monthly unique visitors from 325 million to 390 million by the end of our forecast period. This translates into $1.50 per share increase to our stock price estimate. However, if it fails to attract as many visitors and has only around 150 million unique visitors by then, there could be a 10% downside to its Trefis price estimate. Conversely, if Yelp can attract 500 million unique visitors to its website, it could mean a 5% upside to our price estimate. For more on Yelp’s mobile platform, please read our article here.Notes:
- 10-K [↩]
- Nielsen: 4 out of 5 Yelp users visit the site when preparing to spend money, June 26 2013, biz.yelp.com [↩]