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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 nearly 111,000 active local business accounts in 2015. We currently forecast the number of active local business accounts to steadily increase, as it continues to expand aggressively, reaching around 360,000 by the end of our forecast period. However, if Yelp expands at a slower rate than expected and manages to attract only 160,000 businesses to its platform by the end of the forecast period, there could be a downside of about 50% to our Trefis price estimate. Conversely, if Yelp ramps up its expansion and manages to attract more than 550,000 businesses by then, there could be an upside of almost 40% to our Trefis price estimate for Yelp.
Yelp deals revenue
- Yelp's revenue from Yelp deals, partnership and other services:
Over the past few years, Yelp has acquired companies such as Eat24 etc to bolster its reservation and deals platform Furthermore, it has implemented call to action strategies by enabling users to order from within the Yelp app itself. As a result, its deals and partnership revenue jumped to $70 million in 2015. We expect that by the end of our forecast period in 2023, Yelp's deal, partnership and other revenue would increase to $165 million.
However, if Yelp expands at a slower rate than expected and manages to generate only $100 million its platform by the end of the forecast period, there could be a downside of about 10% to our Trefis price estimate. Conversely, if Yelp ramps up deals business through organic and inorganic route, and manages to generate revenue in excess of $250 million by then, there could be an upside of almost 10% to our Trefis price estimate for Yelp.
Yelp has moved away from brand advertising in 2016 and is focusing on building its Local ads business. As a result, we expect the revenue from this division to wind down to zero by the end of our forecast period.
Sales And Marketing Expenses
- S&M as a percentage of Revenue:
We currently expect Yelp's selling and advertising expenses (S&M) to decrease from around 50.9% in 2015 to 43.9% 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 40% 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 40% 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 121 million reviews of local businesses in multiple markets, including the United States, Canada, some European countries, Singapore in Asia and New Zealand in Asia-Pacific. The company currently offers information on more than 3.5 million businesses in the markets it operates in. It had more than 160 million monthly unique visitors at the end of 2015.
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. In 2015, Yelp generated 87% of its overall revenue 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 95 million user reviews of around 2.6 million local businesses. Due to its large repository of user generated information, it attracts more than 160 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, Asia and Europe. It plans to expand globally into multiple countries across the world - to achieve this, it can use its tried and tested techniques, and its experienced sales force to attract new users and businesses. It expanded its operations to 32 countries in 2015. Going forward, it plans to continue its rapid expansion spree in the US as well as abroad.
Large community and network effects
Yelp has one of the largest communities of active contributors, who write detailed reviews about local businesses. Its community has contributed more than 95 million reviews to date, and continues to generate more than 60,000 local business reviews every day. Its large repository of reviews attracts more than 160 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 2015 to be $170 billion, which is expected to reach nearly $253 billion by 2018.
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 And Assimilation of Eat24 & SeatMe
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. Furthermore, the company continues to assimilate SeatMe and Eat24 businesses into itself. As these services gain traction, 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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