Yelping for a Higher Stock Price

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

The local ad market offers tons of opportunity and Yelp (NYSE: YELP) provides possibly the best way to play that market. The local online ad market already has reached $23 billion of the roughly $100 billion spent in local ads each year. Yelp is quickly placing itself as the place to generate high quality leads via check-ins, reservations, clicks to their websites, phone calls, and even directions with a depth of user reviews that can’t be replicated by a new service.

The stock trades at a high of 10 times current year revenue, yet it might have plenty of upside with a market value of only $2.3 billion. The company competes against Angie’s List (NASDAQ: ANGI) and compares to TripAdvisor (NASDAQ: TRIP) for user review potential.

Mobile advantage

Yelp saw a surge in revenue during Q1 2013, partially due to the uniqueness with its service that mobile drives similar ad rates as desktop. Due to the nature of local purchases, a user on a mobile phone is more valuable than somebody sitting at home.

Yelp saw mobile users on 10 million unique devices during Q1 with 36% of total impressions coming from the mobile app. The company just began mobile display ads during Q1 and the number should only grow from here.

These additions helped total revenue surge 68% year-over-year while reviews and monthly unique visitors only grew around 43%. The revenue growth was lead by an 81% surge in local revenue, partially benefiting from the unique advantage of mobile traffic.

Closest competitor

Angie’s List is seen as the biggest competitor, though the company operate a different model. Angie’s relies on reviews from verified members that pay subscriptions to join the site. Yelp relies on free users that bring a larger pool of reviews though some see the quality as less. Typically, Angie’s is seen more in the services sector versus the restaurant reviews on Yelp.

At the moment, Angie’s is the larger company with revenue expected to hit $247 million in 2013. That amount slightly exceeds the $219 million Yelp is expected to generate. Oddly though, Yelp has a considerably higher market value than the $1.6 billion of Angie’s, predominantly due to expectations that the free user model will eventually swamp the content available from the limited membership base of Angie’s. If investors think the quality of user reviews will eventually win out, than Angie’s does provide an attractive valuation at these levels.

User review comparison

While TripAdvisor operates in the completely different travel industry, Yelp does offer reviews in that category that could end up competing head to head more in the future. TripAdvisor, though, is more useful for a comparative valuation analysis and gauge of the future potential of Yelp.

TripAdvisor has revenue expected to reach over $935 million this year with a market cap approaching $9 billion. It has been extremely profitable ever since being spun off from Expedia at the end of 2011. The stock trades at 28 times forward earnings and doesn’t show any signs of slowing down with revenue growing at 20%-plus per year.

Bottom line

While Yelp’s stock has surged from the start of the year, the comparative analysis with TripAdvisor suggests that stock has years of growth ahead and a decent valuation for investors starting here. Naturally, the company needs to turn consistent profits in order to maintain that revenue multiple. Oddly, if analysts excluded stock-based compensation, as in most growth stocks, Yelp would’ve been slightly profitable in Q1. Most notably, operating cash flows were $250,000, suggesting the company could have an extremely profitable future similar to TripAdvisor as existing markets mature.

Angie’s List provides a compelling valuation if investors believe the membership concept will rule the review world. In the end, the overwhelming amount of content on Yelp could eventually swamp the limited content from Angie’s, making Yelp the more desirable local site considering the lack of cost for users.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of 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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