Solid Growth Is Expected for This Social Media Company

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

Yelp (NYSE: YELP), which connects people with local businesses, continues to deliver for its shareholders and has gained over 18% YTD. Now, Yelp has expanded its delivery services for consumers through partnerships. By teaming up with smaller companies, such as Eat24Hours LLC and Delivery.com LLC, Yelp now offers food-delivery service for consumers. Yelp continues to be a great buy as it continues to strengthen its market position and capitalize on its traffic.

Strengthening its offerings

While advertising revenue accounts for 75% of Yelp’s sales last year, Yelp is aiming to attract and retain advertisers via its new home-delivery service. Popular delivery service providers, Seamless and GrubHub, which merged recently, have expanded to 500 US cities and 20,000 local takeout restaurants, delivering near $875 million in food sales to local restaurants and generating over $100 million in revenue.  Analysts, on the other hand, are expecting Yelp to generate near $219 million in revenue for 2013.

Earlier in June, Yelp also announced the integration OpenTable's online reservation system directly into the Yelp platform. On the other hand, restaurants make up around 29% of the reviewed businesses on Yelp, so it makes perfect sense for Yelp to focus on and expand its restaurant offerings first. By integrating entire review, reservation or order, and checkout process, Yelp can enhance user experiences and make consumers stay longer. Yelp can also convert traffic to revenue via shared transaction revenue with food delivery companies.

Upside potential vs. downside risk

Yelp’s new food delivery service is starting out in San Francisco and New York through partnerships and is “staging,” as described by Yelp’s CEO, before the platform enters new markets. By making the new service flexible, Yelp is scaling up its offering with minimized risks. On the upside, more categories can be expanded gradually, ranging from spas to professional dental services, following the same model. Yelp is taking a small yet critical step forward to become a commercial service provider, yet remaining focused.

While reviewing remains an essential part of Yelp’s core value, the company has been stepping up with “Call to Action” and Yelp Deals features. Now, by introducing transaction offerings, Yelp is closing the loop to create a more effective process for users. Consequently, more local communities can get involved achieving a stronger ecosystem. It opens endless opportunities down the road by linking consumers directly to local businesses.

Competitors

While Yelp continues to evolve, other competitors, such as Facebook (NASDAQ: FB) and Groupon (NASDAQ: GRPN) are not slowing down. Facebook has launched a new graph search, which allows users to search Facebook social graph for people, places, photos and interests faster and easier with more relevant results. Groupon, while struggling, has been reducing its cut from its merchant partners and making its deals stay longer on the site to stabilize its bottom line. As a leading social media company, Facebook continues to roll out new features to enhance its value offering. On the other hand, Groupon may have already found a way to sustain its business. Both companies could be bringing up similar services if Yelp continues to show success with its new partnerships. There are other competitors, such as Google and Foursquare, who would also be interested in new cash-generating revenue model.

While Groupon is still operating at a loss, Facebook and Google continue to be the dominant players in the social media and search markets, respectively. Although Facebook and Google are financially sound, Facebok needs strong growth to sustain its extremely high P/E.  Overall, Google has the most impresssive fundamentals among potential competitors with a solid balance sheet (over $50 billion total cash with only $7.38 billion total debt) and strong cash flow while fairly valued at P/E of 27.48.

What next?

Despite all these competitors, Yelp, which generates 102 million unique visits a month, has a unique edge with its strong focus on bringing consumers and local businesses together. Yelp can better understand what users are looking for. Recently, Yelp also launched a revamped Nearby feature, which delivers more relevant information to users. By making itself an integral part of the decision-making process, Yelp creates strong stickiness with its users.

With near 60% and 43% estimated revenue growth for 2013 and 2014, Yelp is expecting to generate profit in 2014. Yelp has a higher revenue growth rate as compared to other social media companies, such as Facebook and Groupon. With increasing offerings, Yelp is a solid bet for revenue growth. Furthermore, Yelp also has a healthy balance sheet with near $94.50 million total cash and zero total debt. Yelp is a great bet for investors looking forward to invest into the social media company with fast growth and a healthy fundamental.

Foolish take away

By engaging with its users and delivering what users are asking for, Yelp continues to evolve and strengthen its competitive position in the commercial world. More upside is expected for Yelp with promising growth outlook.


WenYu Huang has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure