Exploring Yelp’s Base, Bull and Bear Case Scenarios
Yelp’s (NYSE:YELP) has emerged as a de-facto search engine for local businesses over the past few years. However, over the past few months, the stock has underperformed the market as it has failed to live up to the analysts’ expectations. While the recent return on Nasdaq and S&P has been 7% and 3%, respectively, Yelp has fallen over -21%. Analysts were expecting a much higher growth rate than Yelp was able to deliver. However, we estimate that with the existing growth rate and revenue run rate, the stock is fairly valued at $50.45. In this note, we explore the base, bull and bear case for the company. A summary of this is as follows:
| EPS in 2015 | Price | |
| Base Case | $ 0.25 | $ 50.45 |
| Bull Case | $ 0.32 | $ 68.93 |
| Bear Case | $ 0.20 | $ 37.77 |
Check out our complete analysis of Yelp
The Base Case
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In the base case scenario, Trefis estimates that Yelp’s stock is worth $50.45. While its local advertising business contributes 80% to the price estimate, Yelp’s brand advertising and deals division makes up 11% of the estimated value, with cash accounting for the rest.
The key drivers for the local ads division are average revenue per active advertising local business account and the number of advertising local business accounts listed with Yelp. The company has a total addressable market (TAM) of 76 million local businesses in the world, of which 53 million are present in the Americas and Europe. This translates into a global market of nearly $130 billion. However, the number of active business, which pay for Yelp’s services, listed with the company is just a fraction of this market at 90,200 in Q1 2015. Trefis believes that the active advertising business will grow to 331,950 or 4.5% of 7.37 million claimed businesses by 2021. Furthermore, average revenue per active local business (ARPALB), which measures the monetization rate of a city or region, would grow to $4,667.
Trefis estimates that Yelp’s mobile app will help the company attract more users to its web property (which includes both the web site and the app itself). This should bolster its brand advertising revenues as average revenue per unique visitor improves to $31.38 for over 263 million users by 2021.
Yelp continues to expand its portfolio through acquisitions such as SeatMe and services through facilities such as Call to Action, which lets a user place an order from Yelp’s platform. We believe that, as more businesses are added to Yelp’s platform, these services will have an additive and network effect on deal division revenues, which will increase from $23.92 million to $107.52 million by 2021.
The Bull Case: Stock Price Improves By 36%
In the bull case scenario, we estimate that Yelp’s recent expansion into international markets, coupled with the continuous recruitment drive to persuade more businesses to join advertising services, can help the company to improve the share in claimed businesses from 4.5% to 5.5% by 2021. This would translate into 402,760 advertising businesses for local ads division. Trefis also estimates that the ARPALB for the bull case scenario can improve to $5495 by 2021 as cohort maturity plays an important part in improving monetization rate.
Furthermore, initiatives such as Call to Action and the assimilation of acquired delivery services into its platform together can help the company to achieve an improvement in its deals division revenues to $176 million by 2021. However, brand advertising revenue will continue to grow at the base-case rate as competition from other online companies should restrict the ARPU growth rate. Trefis estimates that if the bull case scenario were to pan out, its stock price estimate for Yelp can increase by 36% to $68.
The Bear Case: Stock Price Declines By 25%
In the bear case scenario, on the other hand, we estimate that intense competition would prevent the conversion from claimed businesses to advertising business. As a result, the share in claimed businesses can decline from 4.5% to 4% by 2021. This would translate into 298,750 advertising businesses for local ads division. Furthermore, as the company is currently expanding into new geographies, the monetization rate can be negatively impacted. we estimate that the ARPALB for the bear case scenario can decline to $4,433 by 2021.
Furthermore, the bear case foresees lower growth from initiatives such as call to action and the assimilation of acquired delivery services (SeatMe, Eat24) into the platform. Thus improvement in its deals division revenues grows at a slower rate to $100 million by 2021. However, the brand advertising revenue will continue to grow at the rate mentioned in base case scenario as competition from other online companies should restrict the ARPU growth rate while the growing popularity of app should offset the slower growth rate of ARPU. Given these factors, the bear case stock price estimate for Yelp will decline by 25% to $37.77.
At present we have a $50.45 price estimate on Yelp, which is 10% above with the current market price.
See our complete analysis for Yelp’s scenario
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