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Summary

  • The recent fall in the stock price has made Yelp an attractively priced stock.
  • There is a lot of room for the company to grow its revenues and the growth is unlikely to slow in the short-medium term.
  • The company might face some negative publicity after some businesses accused Yelp of punishing them for not advertising with the company.

Yelp (NYSE:YELP) is one of the fastest growing technology companies. It helps people find local businesses and leave reviews about different businesses. Despite a fall of over 43% since the start of March; the stock is still up over 100% during the last twelve months. The company mainly generates revenue through the sales of ads on the website, and there have been some allegations recently about the practices of the company - some business owners have accused Yelp of changing reviews if they do not decide to advertise with the website. Nonetheless, the recent fall has made the stock attractively priced and it might be a good time to take a position in this stock.

Fundamentals and the Stock Price

Yelp will report its first-quarter earnings on April 30 - the revenue growth for the company is expected to remain strong due to the expansion. At the end of the last quarter, Yelp reported a loss of $2.1 million; however, the stock still gained 20% after the earnings. The results of the company were in line with the analyst expectations. For a number of growing companies, the investors usually look at the revenue growth as it shows the company's ability to exploit the growth opportunity, and if the company can continue revenue growth in the short term then the investors sometimes ignore the profitability as the belief is that the profitability will eventually come as the expansion costs come down. Average annual revenue growth for the company has been over 60% during the last three years. However, the rise in the stock price has been a lot higher than the growth in revenues.

Yelp's price-to-sales ratio is 15.2x while the industry's average is 6.5x. The company reported a net loss; as a result, the price-to-earnings ratio is meaningless at the moment. It is usually normal for the rapidly growing technology companies to have high price multiples. However, as the companies slowly enter the maturity in their life cycles, the price multiples come in line with the industry averages. The company is spending all the money for expansion at the moment. The company generated $21 million in operating cash flows last year, which was equal to the CapEx for the same period. The fundamentals of the business will improve; however, the price multiples are expected to remain higher than the industry averages in the short-medium term.

Long-term prospects

One of the most important metrics for the internet businesses is the active user base - Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) has achieved massive growth on the back of rising daily active users. However, the user bases for these companies are slowing as these companies already have massive user bases and there is little room to grow. However, Yelp's current user base is around 120 million, and there is a lot of room for the company to grow its following.

The company has recently expanded in Latin America launching in Mexico. Previously, it broke ground in Asia with its launch in Japan, a major hub of both small and large businesses. Yelp now has operations in 26 different countries and is rapidly expanding its network.

We believe that this growing global presence will allow the company to achieve substantial growth. The company has shown massive increase in its reviews reaching 53 million in the previous year, representing a robust increase of 43%. The new markets will allow the company to take these growth rates even higher.

Advantage in the Mobile Segment

Yelp's advantage is the social media aspect of its business. Among its 120 million users, 53 million are mobile users. In the previous quarter, 47% of the company's total ad revenue came from mobile devices, which means approximately half of its business is well positioned to generate greater revenues from the growing mobile segment across the globe. This aspect of the business will allow the company to not only grow its user base, but also increase its revenues. The increasing revenues would allow the company to cover its fixed costs and start generating the long-awaited profits in the coming years.

Revenue Growth will Continue

Yelp presently has more than 1.5 million businesses in its constantly growing global platform and the ratio of paying business accounts to non-paying grew by 69% to 67,200, compared to the same period last year. The growth in the new business accounted for around 4.5%, and we expect this rate to grow further in the coming years. As a result of SEC allowing the businesses and advisors to use third-party social-media endorsements, there might be a larger number of businesses willing to join the website. Increased participation by business will result in increased revenue for the company.

Furthermore, Yelp has recently made a deal with YP, a local ad platform. YP links businesses and consumers through several mediums including mobile, online and print. We see this strategic move of Yelp to be very beneficial in medium-long term. This is because YP is the leader of local market with its reach to 90% of the US population.

Conclusion

The earnings announcement for the first quarter is not far and if the company is able to meet the expectations; we might see another big rise in the stock price. In the long term, the prospects of the business remain bright as there is a lot of room for the company to grow. We believe the recent fall in the stock price has made it attractively priced.

Source: Is Yelp A Good Investment?