Yelp (NYSE:YELP) surged 13% on Q2 earnings as the market continues to make the mistake of focusing on the wrong user metrics. My previous research highlighted the issues with Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) attempting to block search traffic going to Yelp.
The stock closed at $36.83 on Wednesday and magnitudes above the February lows of $14.53. The key though is that looking at a two-year chart presents a different view of the stock trading at a reasonable valuation considering the Holy Grail opportunity in local ad revenue.
The stock was crushed over the last couple of years as investors solely focused on unique visitor metrics. The stalling user growth was always a concern, but Yelp had the workable solution in the mobile app that allowed users to bypass Google searches. Even better, the mobile app provides the Holy Grail of providing local restaurants and stores where the consumer is located based on the phone.
While desktop unique visitors and mobile web unique visitors aren't showing much in the way of growth if not declines, app unique devices grew nearly 10% sequentially to a new record 23.0 million devices. The reason this number matters the most is that mobile app users view 10x more pages versus the website users mostly coming from Google searches.
Source: Yelp Q216 presentation
In essence, Google is blocking the casual user, but the top customers go directly to the Yelp app to do local searches. These users are the ones that advertisers are dying to reach. Remember that one app user equals multiple consumers in most cases. A mom looking for a restaurant could equal a family of four eating at the local restaurant found via Yelp.
As Yelp lists in the investor presentation, a BIA Kelsey report forecasts the U.S. local ad spend to reach $151 billion this year. Yelp doesn't even account for 1% of the ad spend now, providing years of growth opportunities. In addition, this amount excludes an opportunity in the 30 countries the consumer review site has review sites.
With the stock surging to nearly $37, the real question now is whether the valuation has gotten ahead of the results. Yelp is now worth roughly $2.8 billion with an enterprise value below $2.5 billion.
The stock offers 41% local revenue growth and analyst expectations now approaching revenues of $900 million next year. The end result is that Yelp still trades at forward P/S ratios below a group of stocks like Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD) and Twitter (NYSE:TWTR).
The most relevant valuations are probably LinkedIn that got the buyout offer at nearly double the multiple of Yelp. As well, the struggling and hated Twitter valuation even exceeds the multiple of Yelp.
The key investor takeaway is that the rally only brings the stock back to a typical low-end valuation multiple. The massive opportunity in local ad spending and the growth rate obtained by Yelp suggests the stock should obtain a premium valuation multiple. Based on this analysis, the rally still has plenty of legs.
Disclosure: I am/we are long YELP, TWTR.
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.
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