Yeah Yelp - Fresh Highs As Growth Continues And Losses Diminish

| About: Yelp (YELP)

Investors in Yelp Inc (NYSE:YELP) are reacting with enthusiasm to the company's second-quarter results. There are a lot of promising developments to be found in the report, including very strong revenue growth and rapidly narrowing losses.

Yet I remain on the sidelines. The possibility of a take-over remains very real, yet I am worried about the impact of competition if an established technology player starts to compete directly with Yelp.

Second Quarter Results

Yelp generated second-quarter revenues of $55.0 million, up 69% on the year before. Revenues rose by a strong 19% in comparison to the first quarter.

Net losses more than halved from $2.0 million last year to $0.9 million, or $0.01 per share. In comparison, Yelp reported a $4.8 million loss for the first quarter. Analysts were expecting that Yelp would report losses of $0.04 per share.

Adjusted EBITDA rose from $1.6 million last year to $7.8 million.

CEO Jeremy Stoppelman commented on the developments over the past quarter, "We had a great second quarter with strong execution in all areas of our business as the Yelp brand becomes increasingly prevalent around the world."

Looking Into The Results

Yelp has seen strong growth across all operating metrics. Cumulative reviews were up by 41% to 42.5 million, while the number of monthly unique visitors rose by 38% to 108 million. The company saw a 62% increase in local business accounts to 51,400.

Yelp continues to be very attractive for local businesses. An incredible 89% of all consumers who find a local business on Yelp make a purchase within a week.

A Strong Base For The Rest Of The Year

Based on the solid second-quarter developments, Yelp is looking with confidence towards the remainder of the year.

Third-quarter revenue are projected to come in between $58 and $59 million. This implies that revenues are expected to increase by 61% on the year before, and will increase by 6.5% compared to the second quarter. Adjusted EBITDA is expected to come in between $7.5 and $8 million. The revenue guidance came in ahead of the consensus estimate of $57.4 million.

Full-year revenue are expected to come in between $222 and $224 million. This implies that fourth-quarter revenues could come in between $63 and $64 million, up 54% on the year before. Full-year adjusted EBITDA should come in between $27 and $28 million.

Consensus estimates for full-year revenue stood at $219.8 million.


Yelp ended its second quarter with $96.8 million in cash and equivalents. The company operates without the assumption of debt, for a solid net cash position.

Revenues for the first six months of 2013 came in at $101.2 million, up 68% on the year. Net losses roughly halved to $5.7 million at the same time.

Factoring in a 25% jump following the release of the results, shares are trading around $52 per share. This values the company at around $3.35 billion, or its operating assets at $3.25 billion.

As such, operating assets of the firm are valued around 15 times 2013's annual revenues and 120 times full year adjusted EBITDA.

Given the lack of profitability at the moment, Yelp does not pay a dividend at the moment.

Some Historical Perspective

Shares of Yelp were sold to the public back in March of 2012 as the firm and its bankers sold shares at $15 per share. Shares quickly rose towards $25 per share, but have moved in a $15-$30 trading range ever since.

In recent months, as Yelp released an upbeat first-quarter earnings report, shares broke upwards through the $30 trading range. Including Thursday's gains, shares are trading around $52 per share, for year-to-date gains of almost 200%.

Between 2009 and 2013, Yelp is on track to almost ten-fold its annual revenues towards $220 million. Losses have been increasing in recent years, but losses are expected to fall in 2013.

Investment Thesis

Yelp is making great progress. Revenue growth is impressive, and although growth rates will slow down in the remainder of the year, Yelp will continue to grow at very high rates.

Furthermore, Yelp is conquering new markets and unveiling new initiatives to boost engagements, offerings and thereby its revenues and earnings. Key expansion areas include the large market for restaurant bookings after Yelp acquired the online restaurant reservation company SeatMe for $12.7 million to compete with OpenTable. By directing Yelp's huge user base towards these growth markets, Yelp could accelerate its services in the sector.

The strong diverse base of advertisers, as Yelp is focused on small businesses, brings great diversification in its revenue streams. Total advertising revenues from local businesses rose by 77%, now making up 81% of total revenues. Promising as well is that an impressive 59% of Yelp's searches are conducted on mobile devices, which generates 40% of total advertising revenues.

Just like Facebook (NASDAQ:FB), Yelp hereby proves that companies can earn advertising revenues from mobile devices and tablets. Yet its reliance on Google (NASDAQ:GOOG), which drives roughly half of Yelp's traffic, remains a concern, but could be alleviated as more and more users directly find its website and application.

All in all, there are a lot of green lights with new initiatives, rapid revenue growth, and losses, which are narrowing rapidly. Shares have more than tripled since going public in spring of 2012. With (NASDAQ:YHOO) being on an aggressive acquisition path, the possibility of a take-out remains very real given the limited market capitalization of the firm.

Yet I remain on the sidelines. The stand-alone valuation remains very high despite the positive signals and initiatives. Yet I remain worried about the possibility of a tech giant competing against he firm by building a local review website organically, rather than acquiring Yelp.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.