A Web 2.0 Company with Weaknesses

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Consumer reviews site Yelp (NYSE: YELP) has managed to grow top line revenues in a very impressive manner. However, its bottom line hasn't come of age yet; it has been consistently in the red for a while now. With the threat of Google+ Local looming large, along with a number of other formidable competitors, the chances of Yelp swinging towards profitability is rather uncertain. A SWOT analysis is called for to develop a deeper understanding of its current and future possibilities. 

Strengths

Brand Name and Users: Yelp has a strong brand name. People use Yelp frequently to find good places using the collective wisdom of masses. It has managed to grow the number of unique visitors to its platform rapidly, ending Q3 at 83.5 million up 37% Y/Y.

Mobile Front: The company made material progress in building its mobile platform, and currently more than 8 million visitors come from mobile alone. And roughly 45% of its search queries come from mobile.

No Content Acquisition Costs: Yelp uses a crowdsourcing business model and gets reviews for free from able and willing consumers who take the time to write often very detailed reviews with ratings and pictures. The website boasts of 33.3 million reviews from users on a wide range of businesses, even though a large portion of reviews are on restaurants only.

Social Networking: Yelp has very tactfully built out a social networking platform amongst its army of free reviewers. Yelp keeps its most active reviewers happy by flattery via an "Elite" badge  and throwing monthly parties for them.

Weaknesses

Unhappy Businesses: A number of small businesses are irate with Yelp's review handling practices. It has Class Action Lawsuits pending.

Lack of Profitability: Yelp was founded in 2004, therefore it doesn't fall in the startup category and unfortunately for Yelp, it hasn't been profitable yet, according to public data. 

Merchants are not Web-Savvy: Small business owners are often reluctant to spend their limited advertising budget online. They are more comfortable doing it through the traditional way of direct mail and using flyers. 

Mobile Monetization: It has made material progress in its mobile ambitions, but monetization hasn't followed.

International Revenues: Yelp has been investing heavily in building out its international operations in Europe, but it doesn't generate any revenues at all. A number of large internet companies saw a lot of weaknesses in their business operations in Europe, so it would be very surprising to see Yelp monetize its international platform substantially. 

Opportunities

Huge Addressable Market: The local advertising space is a huge one -- a small piece of that pie can translate into millions in incremental revenue for Yelp.

International Expansion: It has already made strong efforts to grow substantially in other non-US markets, using its own brand as well as through the acquisition of Qype.

Broaden Social Platform: Yelp's social networking platform whilst currently small is an attractive opportunity to gain more reviews and increase user engagement, which will attract more advertisers.

Threats

Traffic Flow: The biggest material threat to Yelp's long run sustainability is that a majority of its traffic comes in from Google (NASDAQ: GOOG). And Google has slowly and steadily built out its own holistic service, Google+ Local.

Momentum of Google+ Local: Based on a string of acquisitions and integrating them with its existing services, Google came up with Google+ Local, which includes Zagat Survey, Frommer's, Google+ and Google Maps. It poses a material threat for Yelp.

Competition for Online Deals: Yelp faces substantial and material competition from online deals powerhouse Groupon (NASDAQ: GRPN), as well as Amazon backed LivingSocial. The fight for getting deals from merchants is only going to get more intense and likely lead to consolidation in the space. 

Restaurants/Hotel Category: Heavy competition from a number of small players at the regional level including Foursquare, OpenTable, Menupages, Urbanspoon etc. and on a larger scale with travel advisory company,TripAdvisor (NASDAQ: TRIP), which is a one stop shop for travel, restaurants and hotels.

Facebook's (NASDAQ: FB) Promoted Posts: Facebook has more than 12.8 million small and local businesses that use its Free Business Page, and in order to monetize this audience, it built out a paid product called Promoted Posts. Small businesses are using this to reach their Fans and audience on Facebook. At the end of Q3, more than 300,000 businesses used that product, out of which 25% are new advertisers on Facebook. On a comparative basis, Yelp has only ~36,000 paying business accounts.

Low Switching Costs and Competitiveness: Advertisers can jump ship from online ads very quickly, and the competition for the online ad market is getting more intense, with more and more players joining in. 

Connecting the Dots

Based on the SWOT analysis of Yelp and a look at its recurring losses, there are a number of cracks in the Yelp story. Its business model isn't paying off and requires decent cash outlays before reviews and revenues come flowing in. And an ongoing threat from a large number of well established internet businesses will likely cause more trouble for Yelp.




ishfaque has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and TripAdvisor and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, and TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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