Yelp (NYSE:YELP) is one of the biggest local business listing directories in the U.S., and is fast becoming a de facto search engine for users who wish to make informed decision about availing services from businesses in their neighborhood. While Yelp has been successful in expanding its business in the US market, and monetize it effectively, company’s efforts abroad are still gaining traction. Until last year, the company was eying Europe for expansion. However, it is now aggressively targeting the Latin American markets as it houses over 8.5% of the world population and accounts for 7.3% of world’s gross domestic product (GDP).
Yelp began expansion in this region with the launch of its operation in Brazil last year. This year, the company has expanded its services to Mexico and Argentina.  We believe this to be a good move as these are the three biggest economies in this region, and account for nearly 75% of Latin America’s GDP. In this article, we will discuss how this expansion will affect Yelp’s revenues in the near future.
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International Expansion To Boost Revenue
Yelp has been quite aggressively pursuing its international ambitions. While year 2012 was all about expanding its services to Europe via acquisition of Europe’s largest local reviews site, Qype, year 2014 has been about expanding its services to South America. We expect that as the company expands to new markets, its revenues from local advertising should increase significantly.
According to our estimates, the local ads business makes up over 80% of Yelp’s estimated value. The key drivers for this division are the number of active local business accounts listed with Yelp and the average revenue per active local business account. As a result of this expansion, the total addressable market (TAM) size for Yelp has now increased to over 60 million.  However, the number of active business, the business that pays for Yelp’s services, listed with the company forms just a fraction of this market at 74,000 in Q1 2014. Furthermore, the number of claimed businesses, which have a listing with Yelp but do not pay for any of the premium services, stands over 1.6 million. Considering that mature markets (regions where Yelp has been operational for more than five years) witness higher conversion rates from claimed businesses to active businesses, we expect strong growth in active business accounts. We expect that the base effect will limit the active business listing CAGR to 30%. However, for the company to sustain a higher growth rate, it needs to expand to newer geographies consistently. While we believe that the company can add at least 400,000 active business accounts by 2020, this number can be significantly higher if it continues to expand to other regions in the world
Furthermore, Average revenue per active local business (ARPALB) is one of the most important drivers in our valuation for Yelp’s locals ads business. According to Yelp, monetization rate of a city or region increases with time as more businesses enlist for premium services such as dedicated webpages and call to action to promote its products or services. The ARPALB improved quarter over quarter from $3,800 to $4,292 for regions where Yelp started offering services in 2005, and from $264 to $315 for regions where Yelp services started in 2010.  However, as Yelp introduces its services in new regions, we expect ARPALB to grow at a slower pace as new regions such as Mexico and Argentina have less spending power compared to the U.S., and fewer businesses in these regions are willing to pay for premium Yelp services. We expect this trend to continue till the end of our forecast period in 2020, and project ARPALB to grow to $3,310 by 2020.
Challenges For Yelp
With the launch of services in Argentina, Yelp is now operational in 27 countries. More importantly, it now caters to countries that form a major portion of Latin America’s GDP. However, the current sluggish macroeconomic condition in Latin America, especially Brazil, will negatively impact monetization rate of the websites across this region. Additionally, Yelp continues to invest heavily in sales & marketing and product development for its new markets. We expect that this will affect company’s profitability in the short-term.
Our price estimate for Yelp stands at $56.22, which is 25% below its current market price. We invite the reader to adjust the model and create his or her own alternative valuation.Notes: