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Summary

  • Yelp is rapidly growing its customer base by launching new features.
  • Yelp's focus on international expansion has been fruitful so far, enabling the company to diversify its business.
  • Yelp has a strong balance sheet and outstanding earnings growth projections, making it a good long-term buy.

Over the past one month, shares of online local guide Yelp (NYSE:YELP) have crashed a massive 30%. This would come as a big surprise to investors after Yelp's overwhelming performance in 2013. In fact, when Yelp posted its fourth-quarter results a couple of months ago, its revenue grew a solid 72% year-over-year to $70.7 million, while adjusted EBITDA increased 470% year-over-year to $10.4 million.

Yelp is expected to continue its rapid growth this year as well. Its revenue for the current quarter is expected to jump 60% year-over-year. The company has grown smartly through expansion and acquisitions, and investors would certainly think that now is a good time to add more Yelp shares to their portfolio. But would that be correct? Let's check.

Focus on key areas to drive growth

Yelp's acquisition of its European rival Qype has enabled it to expand internationally, especially in Europe. In addition, despite the tremendous progress that Yelp has made, management feels that it is "just scratching the surface of the enormous local opportunity." Going forward, Yelp is continuously striving to become the de-facto local search engine for the world.

The company is focusing on three key themes that are the focus of its business, and it has made considerable progress in them. Under the first theme, Yelp is focusing on technological advancements. With the increasing usage of smartphones and tablets in mind, Yelp has introduced a number of new features and functions that will help contributors, consumers, and business owners. This will enable its users to get the same great experience on a range of different devices. Also, one of the most notable features introduced by Yelp is that users can post reviews based on their likes and dislikes.

Yelp has received an enthusiastic response for these new features, as 1.1 million reviews in the fourth quarter, which is 30% of total new reviews, were posted on mobile. Also, it has launched a preloaded app for the Kindle Fire, and began powering local search for the Kindle platform. This became yet another way for its users to access Yelp. All these new developments turned right for the company, as the majority of the searches are now coming from mobile. Now, its users can find local businesses wherever they are and on whatever device they are using.

Under the second theme, Yelp is focusing on its expansion plans. We already saw that Yelp has acquired its rival Qype. Also, it has completed Qype's integration in Germany, which is its largest market, and transferred around 1.8 million reviews and approximately 1.4 million photos to Yelp.

Last year, Yelp increased its European sales numbers with the help of advertisements, and also by providing language support for three regions -- France, Spain, and Germany. Yelp operates in 24 countries around the world, and 21% of its fourth-quarter traffic came from outside the U.S. These efforts have placed Yelp on the road to become an international brand.

Product development moves

Lastly, Yelp is focused on strengthening its ties with local business owners. Its Revenue Estimator function has helped businesses evaluate the leads they get from Yelp. It helps consumers in not only discovering the business, but also to place their orders. Also, Yelp's call to action feature has received great response, with local businesses and national advertisers driving more than 40,000 customer leads per week to Yelp advertisers. And one of the most interesting features that the company has added is SeatMe, which will allow its users to reserve tables at a restaurant, bar, or a lounge.

Looking forward, the company will continue focusing on these areas in 2014, along with expanding in new markets and adding new features to the existing ones. Management is looking to provide its users with the best experience, and is of the opinion that:

... we will nurture the source of Yelp's rich content, our community of writers with online and mobile features and offline events.

A look at the fundamentals

Also, if we take a look at Yelp's balance sheet, we find that the company is strong. Yelp has no debt, and has a strong cash position of almost $390 million. In addition, Yelp is also cash flow positive. In the last twelve months, Yelp has generated operating cash flow of $21.4 million, while levered cash flow was $6.08 million.

The only thing that can discourage investors is a high forward P/E ratio of almost 187. However, Yelp's earnings are growing at a solid pace, and over the next five years, they are expected to grow at the rate of 43% per year. So, investors shouldn't be scared of a high forward P/E, since the company is delivering solid growth.

Conclusion

So, we see that Yelp has grown tremendously in the past, and the trend is expected to continue going forward. The company is focusing on a number of opportunities to propel its growth, and a strong balance sheet should help it in this regard. So, investors should definitely consider capitalizing on Yelp's recent crash and load up more shares, as the stock looks like a good long-term holding.

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.

Source: 3 Reasons Why You Should Buy Yelp