Should You Panic With This Falling Local Review Site?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Several failed attempts of acquisitions by Google and Yahoo and even the continuously slipping stock price could not have a big impact on the leadership of the local review site Yelp. The company is steadily increasing its business across geographies as well as gaining market share. And, therefore, it has decided to stand alone and not to merge with any biggie. The company’s stock is down over ~26% since its IPO in March 2012. But the notable fact is that most of the analysts and hedge fund managers are still upgrading it and taking new positions in the company's stock. Cantor Fitzgerald upgraded the shares of Yelp from 'hold' to 'buy' justifying his decision with a perception that the lowered Q4 guidance by the company was related to advertising only and not because of any downfall in its core business of local reviews.
Three of the top hedge fund managers have taken new positions in Yelp’s stock for the quarter ended September 2012. Though the funds’ stakes are minimal, the site has still gained the attention of the market. The hedge fund Andor Capital Management stood on top of the three funds with 500,000 Yelp shares and a 1.48% stake out of their total portfolio in Yelp stock. Intrepid Capital Management (50000 shares; 0.85% stake) and Steadfast Capital Management (479,905 shares; 0.39% stake) come at the second and third positions.
With its global expansions and new market launches, Yelp (NYSE: YELP) is now active in 96 markets worldwide. It will benefit from the continuous migration of advertising dollars from offline to online. The worldwide online advertising market is projected to increase to $120 billion which was only $68 billion in 2010. The total spending on advertising from domestic businesses is estimated to be $6 to $7 billion annually on out-of-home advertising. Yelp should benefit with this opportunity as it has an estimated 790,000 paying businesses. Additionally, the mobile growth opportunity as revealed in the figures given below will positively reflect on Yelp’s business in the long term. The Mobile platform brings a good monetizing opportunity for Yelp as 45% of its queries are now coming through mobile. It’s well acclaimed local reviews and the consumer’s preference for Tablets and mobile will provide a boom in all segments.
A subsequent growth opportunity also exists with growing Smartphone and Tablet sales.
- For 2012 the global Tablet sale is expected to hit 120 million units, up roughly 100% from the previous year.
- Global Smartphone sales are expected to cross 700 million devices, up 40% Y/Y.
In the local search market Yelp directly competes with Google+ Local which was launched in the first half of 2012 with the acquisition of Zagat. Also known as the "burgundy bible, Zagat's acquisition will improve Google's local products. Google (NASDAQ: GOOG) will have leverage to benefit with Zagat's well known guidebooks (the dead-tree sort) that offer reviews and recommendations on restaurants across the world. The launch of Google+ Local has made the search simpler and has also provided the user with an easier way to discover and share local information. For more support to Google+, Google acquired Frommer's travel guide business for $23 million. The Frommer deal will enrich the social site segment of Google with tips, reviews, local and places search. This deal will incrementally develop and help in growing the advertising dollars and online travel bookings.
But, despite the tough competition, Yelp stays at a leading position in the local search market while the search giant Google is struggling. I believe that Yelp has enough catalysts which will positively move its stock price and financials.
Among the total local advertisers of Yelp, only 25% use the performing pricing while the rest are using fixed bundle pricing which comes at $300-500 per month. Another marketing strategy, i.e. variable pricing which can be segmented by geographically and/or category, can provide a good cash-in opportunity for Yelp. Though any of these strategies are not under immediate consideration for management, they possess good potential in the year to come.
Bing Integration With Yelp
Yelp integrated with Microsoft's Bing to give more power to its local search. Bing integrated Yelp's rich reviews, photos and business aspects and its additional specialties for specific category search, making it easier for users to discover something worthwhile. The integration was more from Microsoft's part driven by Google' Zagat acquisition. In a series of actions giving tough competition to Google, Microsoft (NASDAQ: MSFT) also partnered with Encyclopedia Britannica for more specific answers through the searches. The idea is to bring answers in a more organized way with brief overviews of the subject with a thumbnail image and other relevant facts and figures.
Sales Force Efficiency Improving
For the third quarter of 2012, Yelp has managed to cut down on sales and marketing expenses to 55% from 64% in 3Q 2011. This will again represent a significant profit driver and I think will attain the mark of 43-44% over the coming quarters. Another improvement in sales efficiency is driven by increasing sales people growth of 50% as compared to 80% growth in local advertising revenue.
To sum up the above fundamental points, I believe that Yelp has planned its strategies well ahead with its growing online ad platform. The continuous growth in mobile platform should benefit from the rapidly expanding market of Tablets and Smartphones (8.2 million unique visitors monthly). Also, Yelp has introduced gift card certificates for local businesses as it found that people don't prefer coupons as a gift. Business owners can offer gift certificates directly from their profile pages. The gift certificates carry the full value instead of a discount. The company's forward P/E comes at 600x, but going forward it has already marked its growth opportunities which I believe will drive its stock price upward.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google and Microsoft. 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!