Yelp (NYSE:YELP) is one of the largest online business search, review and recommendation service, which enables consumers to access ratings and read reviews and opinions about local businesses like hotels, restaurants, salons, dentists and mechanics on their website. Local businesses are reviewed and rated by contributors. Yelp generates revenue mainly from local business advertising, display advertising and from additional services like Yelp deals, and deals with reservation services like OpenTable (NASDAQ:OPEN). It competes primarily with other online business review services like Google (NASDAQ:GOOG) Places, Yahoo (NASDAQ:YHOO) Local, Angie’s List, CityLocal and Gumtree; display advertising players like Google, Yahoo, Facebook and AOL (NYSE:AOL); and daily-deal sites like Groupon (NASDAQ:GRPN) and LivingSocial.
We currently have a $9.30 Trefis price estimate for Yelp. This pre-IPO valuation takes into account substantial option dilution, which adds an additional 4.1 million shares to the basic pre-IPO share count of 52.7 million. We have not incorporated the proceeds from the IPO or new share count and will update this when the deal is finalized.
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We have broken down Yelp into 3 different businesses which drive Yelp’s value.
Yelp’s Primary Revenue Engine: Local Advertising
Yelp generated more than 70% of its total revenue from local advertising in 2011, and we expect this business to continue to account for a major portion of Yelp’s overall revenue in the coming years. Yelp enables local businesses to advertise on its website through fixed-fee advertising plans. It offers promotional features like enhanced profile pages, sponsored search results and performance based advertising to generate leads and drive traffic to local businesses for a fixed monthly fee.
Yelp had nearly 17,500 average active local business accounts – the businesses through which it generated revenue through local advertising – in 2011. We expect the number of businesses signing up for Yelp’s local advertising products to increase throughout the forecast period, as it continues to expand into new markets and small businesses warm up to the idea of online advertising.
Display Advertising to Rake in Additional Revenue
Display or brand advertising is another important revenue source for Yelp. It generated around 20% of its overall revenue in 2011 from display advertising. In 2011, Yelp saw an average of around 58 million users on its website every month. Yelp currently offers information and reviews on more than 600,000 businesses. As it expands to more markets and covers more businesses, we expect it to attract even more monthly visitors. Any increase in its visitor numbers will directly impact its display advertising revenues, which are linked to impressions and views.