Can This Company Become Profitable This Year?

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

Rapidly growing consumer reviews platform Yelp (NYSE: YELP) has been a strong performer in 2013, with its stock price up more than 123% so far. The company has seen large increases in levels of user traffic to its platform. The company has built up a robust reputation among consumers by making its platform more social, and has a phenomenal position on mobile to keep up with secular shifts.

Strong revenue and traffic growth

Yelp has managed to grow levels of user traffic on its platform consistently. In 1Q12, Yelp's monthly visitors stood at 71.4 million, which increased to more than 102.1 million users in 1Q13, representing a 43% Y/Y increase. Yelp's business model of getting user generated content (UGC) has done very well for the company, in line with competing online on-demand platforms like TripAdvisor (NASDAQ: TRIP)

In the last quarter, the company's revenue increased a healthy 68% Y/Y to $46.1 million. Yelp continues to earn a majority of its total revenue from local advertising. In 1Q13, Yelp earned 84% of its revenue, or $39 million, by offering advertising and marketing solutions to small businesses.

Many investors have been skeptical of Yelp's growth rate, which has led to consistent losses for the firm's bottom line. However, the company's loss per share narrowed to $0.08, and it is well on its way to possibly earn a profit in the latter half of 2013. 

Reviews and customers increasing

The growth of reviews on Yelp has been strong, with cumulative reviews increasing 42% Y/Y to 39.1 million. Yelp's total number of reviews is still well behind TripAdvisor's review base of more than 100 million. However, TripAdvisor's roughly 20 branded sites make it the largest travel information services platform and slightly different from Yelp.

The increasingly social Yelp competes with TripAdvisor for only some segments like hotels, restaurants, shopping etc., but not all categories. Yelp brands itself as the leading local guide for real word-of-mouth on everything, which is different from TripAdvisor. 

Also, TripAdvisor gets more than 230 million unique monthly visitors and has more than 2.7 million hotels and restaurants listed on its platform. On a comparative basis, Yelp is much smaller, but is rapidly growing its listed business accounts increasing to more than 1.1 million at the end of 1Q13. The number of small local businesses paying to advertise and use the services of Yelp has increased a solid 63% Y/Y to almost 45,000.

Yelp's user traffic is still largely flowing in from search engines, with the likes of Google (NASDAQ: GOOG) and Bing contributing 50% or more in traffic. Google has its own small-scale offering of Yelp-like services by offering reviews from Zagat and Google Maps on search results.

And just recently, Google made the restaurant review platform, Zagat, completely free, and launched a new and revamped website. In addition, Google also released newer app versions of Zagat on Android and iOS. And also, the newly rejuvenated Zagat is planning to expand its footprint from 9 cities to more than 50 cities in the U.S. and abroad to cover more categories outside restaurants and nightlife. Going forward, the search dominance of Google coupled with Zagat's expansion might be a more material threat for Yelp from current levels. 

Mobile usage and monetization gaining momentum

Yelp's mobile usage has increased substantially over the past twelve months, and has been one of major positives of the Yelp story. In 1Q13, roughly 45% of Yelp's total searches were done on mobile apps, creating more monetization windows for the company. More than 10 million mobile users are accessing Yelp on-the-go, and as a result, the company's ad sales on mobile increased. 

In the last quarter, roughly 36% of Yelp's total ad impressions were delivered on mobile, which is a healthy sequential increase from 4Q12 when ad impressions on mobile were roughly 25%. The company's management, on the last earnings call, stated that the company is indifferent about how the ads are placed, because the company sells its advertisements as a subscription bundle. 

As a result, higher search volumes on the web and Yelp's app will drive a lot more ad impressions on mobile, as consumers are increasingly trending towards mobile devices to browse the Internet. Yelp will be able to monetize its mobile traffic better on mobile like Facebook, and also tune down the company's reliance on Google for user traffic. Yelp has built up a strong customer base that is increasingly engaged and frequenting Yelp's social media platform even more and contributing more reviews as well.

In addition, Yelp recently acquired SeatMe, a web and iPad-based restaurant and nightlife reservation solutions company for $12.7 million. This acquisition gives Yelp a broader entry into the online book and reservation category, which provides a better user experience and should create more monetization opportunities in the future as well.

Q2 guidance and consensus

Management's guidance range for sales came in at $52.5 million-$53.5 million, which points to a blended Y/Y growth of 62%. And the company is not expecting to roll-out a profit for 2Q13 and gave out guidance for adjusted EBITDA to come in within $4.5 million-$5 million. Yelp is trading at very rich multiples, the company has a negative P/E, and on a Price/Sales basis, it is trading at roughly 17.4 times. As a result, an earnings miss can send the stock plunging, but a large portion of the upside is already factored in. 

The takeaway

Yelp is growing its user traffic, content, engagement, and revenue at healthy levels. The company is also signing up a lot of revenue-generating local businesses, and has a large addressable market, especially in the international market. The company's earnings are a concern, and might be impacted if it keeps expanding internationally. However, management's focus on mobile and delivering more value to local businesses should serve Yelp well. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google and TripAdvisor. The Motley Fool owns shares of 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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