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Summary

  • Yelp has the ability to become the preeminent mobile search app for all local businesses.
  • Yelp has competitive advantage over other local mobile business search apps.
  • Yelp is now a more attractive acquisition target.
  • Analyst price targets raised post-strong Q214.

Yelp (NYSE:YELP) is considered the internet's "yellow-pages" and will become the preeminent mobile search app for all local businesses. Yelp's competitive advantage is that the company is not limited only to the restaurant business as other local search apps. Apps such as OpenTable, Inc. (NASDAQ:OPEN) and GrubHub, Inc. (NYSE:GRUB) are limited to the restaurant industry. OpenTable is limited to restaurants that require a table reservation, these typically being fine dining establishments. OpenTable's market is limited to a small percentage of restaurants considering that the restaurant industry trend is for casual dining not requiring table reservations. The larger metropolitan areas are where most fine dining restaurants are located which can geographically limit the expansion of OpenTable. GrubHub is limited to restaurants which offer "take-out". Groupon, Inc. (NASDAQ:GRPN) offers discount prices for various business types.

Yelp could integrate similar restaurant applications into their business model platform for a user to reserve a table at a restaurant (YELP Reservations/SeatMe), order food online, and offer customer discounts (OpenTable, GrubHub, & Groupon); as well as list and locate virtually any business worldwide. Yelp now has thousands of restaurants using YELP Reservations. Yelp's mobile app for local businesses is seamless and extremely easy to use to locate any local business category for example to contact, locate and book an appointment (i.e. dental clinics, dog groomers, spa treatments, and auto repair shops, etc.) all from a user's mobile device. This provides a tremendous combination of value for this company as they expand their services and find ways to monetize their expansion into additional business services.

Yellow-Page Advertising

A user no longer needs to locate the old traditional hard-copy local yellow pages to find information on local businesses. Yelp provides this to users immediately from their mobile devices with the ability to telephone, provide GPS directions, and review user comments. Yelp can expand internationally into areas that never previously offered "yellow-page" type advertising or a source of local business contact information. Consider the past difficulties in locating the local listing of businesses in a small remote vacation destination (i.e. scuba diving, golf courses, pharmacy, car rental companies, etc.) or having to tear out a page from an outdated phone book from the hotel or convenient store. Mobile search of local businesses will continue to grow exponentially making "yellow page" hardbound books obsolete. Historically, phone book advertising cost business owners many thousands of dollars per listing and marketed to only local customers, not the vast worldwide customer base that mobile advertising offers. Yelp estimated that roughly 25 million businesses exist in both the U.S. and Europe alone, providing tremendous growth potential. In Q214, international traffic grew 80%, monthly mobile unique visitors grew over 50% Y/Y to 68M and approximately 40% of new reviews were written on mobile. Yelp also delivered over 50% of ad impressions on mobile.

Q214 Financial Performance

Today, Yelp is a profitable global company with customers in 27 countries around the world. Yelp reported Q214 results substantially beating on both top and bottom line estimates. Q214 revenue grew a significant 61% Y/Y to $88.8M. Adjusted EBITDA was $17M a 120% increase over Q213. Bottom line the company generated a net income of $2.7M. EPS beat estimates by $.07. Further, management gave Q314 guidance of revenue in the range of $98 million to $99 million which exceeds analyst estimates of $95.4 million. Sales and Marketing expenses dropped by 2% to 54% of revenues vs 56% prior period. Active local business accounts were up 55% Y/Y to 79.9K, which fell short of expectations. They increased about 5,900 sequentially, however analysts were estimating closer to 7,700 merchant heads (primary assumption why the stock price was down 10% post earnings).

(Source: Yelp Q214 Earnings)

Company Investment Risk

Yelp currently has a lofty valuation (not uncommon for a high growth company) therefore, investors should consider this stock as a high growth spec stock; or held as a long-term investment permitting future earnings to support a lower P/E ratio.

Analyst Price Targets (PT) following Q214 Results

· Piper Jaffray - reiterated an Overweight rating raised PT to $90

· Suntrust Robinson Humphrey - maintained a Buy rating raised PT to $90

· Cantor Fitzgerald - maintained a Buy rating raised PT to $84

· Credit Suisse - reiterated an Outperform raised PT to $93

· JP Morgan - maintained a Buy rating and a 2015 $100 PT

· Needham & Co. - maintained a Buy rating and $93 PT

· Pacific Crest - maintained a Buy rating and $95 PT

· UBS - maintained a Neutral rating but raised PT to $80

· RBC - maintained an Outperform rating and $88 PT

· Wunderlich Securities - maintained a Buy rating and $105 PT

Conclusion

Yelp will continue to benefit from the expansion of the local mobile search over the coming years with growing mobile device sales and global expansion. The company reported strong Q214 results and raised its full year outlook above analyst expectations. Yelp has experienced tremendous revenue growth of 60%+ in the last 10 consecutive quarters. The local online advertising opportunity is tremendous and as the company continues to expand and innovate with new products such as reservations and other features which may be integrated into their business model platform, Yelp is well positioned to outperform and become the preeminent mobile search app for all local businesses. Yelp is a likely takeover candidate and would be a logical fit for many Large-Cap internet companies looking to expand their local mobile search capabilities. These factors bring me to the conclusion that Yelp represents a compelling investment with the potential for accelerated earnings growth and more attractive now as an acquisition target with a lower market cap ($4.7B) and profitable operations.

Source: Yelp Long-Term May Devour OpenTable, GrubHub & Groupon