Yelp (YELP)

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WHAT HAS CHANGED?

  1. Yelp tops expectations in Q1; Raises Guidance
Revenues declined 7% year-over-year (y-o-y) to $232.1 million but were largely consistent with Q4, and $2 million above the high end of company guidance. At the same time, recovery in local economies and the increased vaccination rate benefited businesses in the more impacted Restaurants, Retail & Other categories. Yelp’s Q1 adjusted EBITDA jumped a stellar 159% y-o-y to $44 million. In addition, net loss narrowed to $6 million from a year-ago loss of $16 million. The company expects to return to y-o-y revenue growth for the full year 2021. It expects 2021 net revenues to range between $1B-$1.02B, and EBITDA to come in at $175-$195M.

  1. Vaccine Keeps Hope High For Recovery
There is a lot of optimism regarding the vaccine rollouts that have gained steam since February, and Yelp stands to benefit the most from the recovery, given the improving fundamentals since mid-2020. This is also based on the belief that the snap-back in restaurants & bars, beauty & fitness, health, and shopping categories will be relatively fast as the economy opens up. That, in addition to improving trends in Home & Local driven by product improvements and secular tailwinds.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Local Advertising

  • Yelp's Active Local Business Accounts: Yelp had over 520,000 active local business accounts in 2020. We currently forecast the number of active local business accounts to steadily increase, as it continues to expand aggressively, reaching around 768,000 by the end of our forecast period.

Yelp deals revenue

  • Yelp's revenue from Yelp deals, partnership and other services: Over the past few years, Yelp has sold Eat24 etc to GrubHub. As a result, its deals and partnership revenue declined from $75.2 million in 2017 to $37.3 million in 2019. In addition, the pandemic led these revenues to decline further to $36.8 million in 2020. However, we expect the division's revenues to grow to $48 million by the end of our forecast period.

Brand Advertising

  • 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 increase from around 46.7% in 2020 to 47.3% 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.

BUSINESS SUMMARY

Yelp is a local business search, review, and recommendation service that allows consumers to access ratings and read reviews on 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 224 million reviews of local businesses in the North American markets. The company currently offers information on more than 4 million businesses in the markets it operates in. It had more than 96 million monthly unique visitors at the end of 2020.

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.

SOURCES OF VALUE

Local Advertising is Yelp's most valuable business

Yelp generates a major portion of its revenue from local advertising. In 2020, Yelp generated more than 95% 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 205 million user reviews of around 4 million local businesses. Due to its large repository of user-generated information, it attracts more than 96 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 that it uses to expand into new markets in the United States. While it has exited the international markets, it plans to expand its services aggressively in the untapped U.S markets.

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 140 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.

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