Yelp: Just Getting Started

| About: Yelp (YELP)


International expansion provides growth catalyst.

Cohorts nearing 10-years old are still growing in the 60% range.

The stock is approaching cheap valuations based on growth prospects.

The incredible part of the Yelp (NYSE:YELP) story is the consumer review site is only getting started internationally. During April, the company entered the 26th country in the form of Japan, but it only obtains roughly 3% of revenue from those international locations.

The stock has been absolutely crushed with investors abandoning the hot social media stocks of 2013. At these moments, its good for investors to distinguish between a company and a stock. Yelp the company reported fantastic results for Q114 and provided more solid guidance for the rest of the year. In addition, the company did a fantastic job of portraying a thriving business with tons of growth catalysts for the future. Yelp the stock was priced for perfection back at the start of March when it hit over $100 and traded at valuations approaching 20x forward revenues.

Now the valuation is down to a more respectable 7x forward revenues and within a level that will make an attractive investment, but lets review some of the metrics to see how we get to that determination.

First quarter results

As mentioned above, the company generated solid results suggesting further strong growth. Investors looking for positive earnings were no doubt disappointed, but it doesn't add up that they were invested in Yelp in the first place.

Yelp provided the following highlights for the quarter:

  • Net revenue was $76.4 million in the first quarter of 2014, reflecting 66% growth from the first quarter of 2013.
  • Cumulative reviews grew 46% year over year to approximately 57 million.
  • Average monthly unique visitors grew 30% year over year to approximately 132 million and average monthly mobile unique visitors grew 52% year over year to around 61 million.
  • Active local business accounts grew 65% year over year to approximately 74 thousand.
  • International reviews grew 210% and international traffic grew 95% year over year.

Again, all of these metrics highlight an incredibly run company. Naturally, the concern that is causing investors to dump the stock is the reported loss of $(2.6) million, or $(.04) per share. Oddly, numbers that were better than expected and initially sent the stock higher, but the market did an about face and decided to crush the stock after the initial run up following earnings.

Growth Catalysts

Yelp has plenty of growth catalysts with international expansion being a prime focus. International revenue only hit $2.5 million during the first quarter, but other growth opportunities exist within the U.S. based solidly on signing up more and more users and business accounts.

The company estimates that roughly 25 million small businesses exist in both the U.S. and Europe. With only 74,000 active business accounts, Yelp has a long runway for adding business accounts. Only obtaining 10% of the business accounts in both the U.S. and Europe would cause the active accounts to explode to 5 million from only 74,000 today.

Other opportunities exist for growing the engagement within the site. The company recently starting partnering with Booker to allow spa appointments to be booked directly from the site. In addition, the integration of SeatMe that the company purchased last year provides for plenty of growth in the area of reserving a table at a restaurant.

Cohort Analysis

Investors not understanding the growth potential of the concept and the reason for ongoing losses needs to look no further than the cohort analysis from the earnings slides.

Though the slide lacks the cost aspects, one can quickly make a reasonable guess that the more established cohorts have solid margins. In addition, the huge growth by the cohorts that are going on 10 years old showcase the potential for the company.

This slide highlights the growth potential of international expansion and why the company isn't showing profits. With the entry into Japan and Mexico, the company is spending money to support the site and build up a user presence, yet the revenue will lag for a few years. Yelp could easily stop expanding markets and quickly generate a profit off the original cohorts of San Francisco and New York, but it wouldn't provide that long-term growth opportunity.

Stock Valuation

The stock valuation is more compelling now that its lost nearly 50% of its March value. The key to understanding the value proposition is that Yelp will quickly grow into about any metric used by investors. The stock trades at an enterprise value multiple of forward revenues of around 6x. This might appear expensive to investors, but even Google (NASDAQ:GOOG) with a market value of nearly $350 billion and a growth rate of around 20% trades at an enterprise value of nearly 5x forward revenues.

YELP EV to Revenues (Forward 1y) Chart

YELP EV to Revenues (Forward 1y) data by YCharts


Yelp provides a good example of the extremes of the market. Investors need to focus back on the company and realize that it provides an excellent investment in the global consumer review business. It is a must own stock whether one thinks the stock is still going lower or it has already hit bottom. Analysts expect near 60% revenue growth for the year and profits near breakeven. The stock could go lower, but with that type of growth the company will quickly grow into the existing stock price and surpass it.

The company has too many growth catalysts including international expansion and new tools for the domestic website to remain at the current valuation for much longer. With Yelp just getting started, investors shouldn't be selling now.

Disclosure: I am long YELP. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.