Well, now we just may know where Google's ad revenue went: Yelp and Facebook.
Google (GOOG) missed Wall Street's consensus for reasons attributed to a decrease in the price of mobile ad revenues. A recent Forbes column by Contributor Robert Hof indicated that mobile ads were already 40% less than prices for ads served on desktop computers and his opinion as to why they continue to decline may be that Google is offering more of them, which could be pushing the prices down as a corollary.
Conjecture that was not put forward in Mr. Hof's column was that advertisers have significant options outside of the Google universe of mobile ads such as those being sold through Facebook (FB) and clearly companies like Yelp (YELP). I believe this is a blip for Google with its diversified portfolio and increased emphasis on non-ad related revenues for the future. However, for younger and rapidly growing companies like Yelp with much smaller market caps, Google's loss in revenue from this segment will be their gain.
Taking a look at Yelp's Q2 Earnings Call transcript, Jeremy Stoppelman - Co-Founder, Chief Executive Officer and Director stated:
"As evidenced by the 62% increase in the active local business accounts, businesses are increasingly recognizing the value of Yelp... approximately 40% of our local ad impressions were on mobile. Together, our app and mobile site accounted for 59% of all searches, including approximately 46% just from the app."
Google's Q2 net revenue, which excludes payments to ad partners, was $11.1 billion while analysts had expected net revenue of $11.33 billion, excluding the cost of stock options.
Facebook announced $1.81 billion in revenue for the company's second quarter of 2013, compared to analyst estimates of $1.62 billion in revenue.
Although anecdotal, it is interesting to note that Google missed expectations by a couple hundred million, while Facebook and Yelp exceeded by a combined dollar figure that is close to difference between Wall Street's expectation for Google and their reported number.
It appears that mobile may be leveling the playing field between companies like Facebook and Yelp versus the powerhouse Google. The strength of Google Search has been based upon the fact that when people conduct a search, they are often looking specifically for information on a product or service and are often looking to make a purchase. For mobile, which is growing thanks to the use of smartphones, Google's traditional advantage may be mitigated and hence make the eyeballs of Facebook and Yelp users more attractive depending upon the nature of the product or service being advertised.
If a consumer is considering a larger purchase, they might not be inclined to research it on Google while mobile. Interestingly, Yelp's CEO Stoppelman also said in their conference call: "in the second quarter, a study recommissioned by Nielsen found that when consumers find a local business on Yelp, 89% make a purchase within a week."
That is a high conversion rate and it makes sense that it would be so given the often spontaneous way that consumers make purchase decisions when deciding on a restaurant and various forms of entertainment. Hence, mobile may be regarded as Google's "Achilles' heel" so to speak for certain specialized genres. It just so happens that those genres are a combined trillion plus global segment of the economy.
We have seen what has happened to companies that have achieved "critical mass" in other industries such as travel. What kind of numbers could we eventually be talking about as Yelp continues to grow? Priceline.com (PCLN) now commands a market cap of near $46 billion.
When people go to Priceline.com they are also usually looking to buy in the very near future. Travel is more expensive but people travel less frequently than they go to a restaurant or buy movie tickets. Travel is an enormous market but the revenue could be made up for in volume by comparison.
According to the National Restaurant Association's website, the restaurant-industry sales projected for 2013 amounts to $660.5 billion.
According to the ustravel.org website, annual spending on the travel industry amounts to approximately $855 billion, although $201 billion of that includes spending on restaurants (patronized during traveling). Subsequently, although many Yelp reviews are written by "locals", Yelp is a great source of restaurant recommendations, especially while the consumer is in an area with which the consumer has less familiarity.
Another $89 billion of the annual $850 billion is attributed to recreation/amusement, which is another segment for which Yelp is commonly used. As Mr. Stoppelman aptly put it during the call "...this includes the opportunity to buy movie tickets, print coupons or link the promotions on their sites."
We all know that entertainment is an enormous industry and globally it is estimated to be over a $2 trillion industry. Media revenues in the US are estimated to reach $555 billion by 2015.
Considering that Yelp is doing well in their global expansion and that leisure and entertainment is their niche, the future looks bright for Yelp. It is not implausible by any stretch of the imagination that by capturing just a small percentage of those total revenues, Yelp could reach Priceline.com type revenues and valuation as they achieve "critical mass", especially with those impressive conversion rates.
If Yelp could capture 1% of the annual restaurant industry alone (totally excluding all other entertainment), that would put their annual revenue at double the current market cap of just under $3 billion.
The reason why the vast majority of investors kick themselves because they missed the grand-slam investment opportunities in the early stages - is because they heed the advice of Wall Street analysts (like the one at UBS who downgraded Yelp) and they miss the big picture. How far a company's stock rose and how fast has nothing to do with value or future potential. One cannot pinpoint an exact value for a rapidly growing company nor will they pinpoint precise earnings and profit margins while looking 5 years into the future. They can however anticipate an accurate ballpark, but only if they have a rough idea of what they are dealing with in a company and industry.
On that note, I want to end with a succinct quote by CNBC's Jim Cramer because he is onto something with Yelp and seems to see the proverbial forest through the trees. Cramer said that "Yelp is winning in a number of different ways. First, as more and more people use the service, it becomes harder and harder for businesses of all types not to be on the service. And as more and more businesses get listed, well, that only drives more people to the site in a virtuous circle."
One area in which I disagree with Cramer is in his earlier "tweet" in which he contended that Apple (AAPL) should "acquire Yelp for $75 per share." If there is to be an acquisition, it would justify one hefty premium over the current market cap. I think if any company acquired Yelp it would be Google and secondly, since Yelp seems to be well aware of what they are stepping in, they would be giving it away at $75 per share.
I do not make such bold claims often but the writing is on the wall with this one. The last time I made such a claim I stated that Under Armour, then at a market cap of $700 million, would never sell to Nike for less than $5 billion.
I do not have an exact price target but because of their position in the industry, the size of the industries in which they are at the beginning stages of dominating and their competence in executing their business plan - I believe that Yelp will conservatively command a valuation of $8-$10 billion and they wouldn't be giving it away for anything less if there were to be an acquisition.