Yelp: A Big Recovery Play
Summary
- One of the few among tech stocks, Yelp is trading near all-time highs on bullish hopes for the reopening of the U.S.
- As consumers go back to visiting restaurants and brick-and-mortar retailers, Yelp traffic will rebound and advertiser budgets will also return.
- Yelp enters 2021 from a position of strength, having cut a good chunk of its workforce during the pandemic with a plan only to hire back in strategic areas.
- The stock still looks cheap at ~13x forward EBITDA.
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In the time leading up to the tech rout of February and March, I had advised investors that the best move was to retain exposure in tech, but through more cheaply valued stocks that would A) be less susceptible to a downward re-rating of valuation multiples, and B) would stand to benefit more from economic reopening. Yelp (NYSE:YELP), the beloved reviews aggregator that is one of the most-visited sites for restaurant recommendations (despite now having a site that runs the gamut to all types of local businesses beyond just restaurants), was a perfect example of this thesis playing out well.
I last wrote a bullish article on Yelp in November, when the stock was trading in the low $30s. During the first quarter of 2021, rising rates barely made a dent on Yelp's already-modest valuation, and the hopes of vaccine rollout and a recovery in the small-business clients that make up a large chunk of Yelp's advertiser base took Yelp to new heights. In my view, the Yelp rally still has plenty of room to run.
Beyond being an obvious part of the "reopening trade" and the fact that Yelp has seen revenue climb every quarter since the initial hit of the pandemic took place, Yelp has plenty of other strengths going for it in 2021. Chief among them, in my view, is Yelp's wholesale staffing cuts in 2020. Due to the fact that Yelp was one of the earliest and hardest-hit internet companies in 2020, the company took decisive actions quickly to trim its cost base.
Of a ~6,000 total employee headcount, Yelp laid off about 1k workers and furloughed about 1k more last April. In 2021, Yelp is planning to invest in growth again, but only in key areas. In its Q4 shareholder letter, the company wrote about its growth/hiring plans: "To achieve this, we plan to invest in Product development and our Multi- location sales team while keeping Local sales headcount relatively consistent."
This headcount efficiency drive is also coupled with Yelp's existing efforts to migrate more of its workforce away from the costly San Francisco Bay Area, where the company is headquartered, to more remote sales offices. By also materially expanding its presence in these cheaper U.S. markets plus Canada and Europe, Yelp intends to dramatically bring down its average cost per employee.
The net impact of this is that Yelp enters 2021 with a more favorable cost base under its belt. We've already seen Adjusted EBITDA margins march upward in the fourth quarter (despite double-digit revenue drops, driven by advertising declines). The potential for Yelp to both dramatically grow its revenue versus an easy comp in 2020 plus significantly expand its margins is a strong tailwind for the stock in 2021.
Despite Yelp's generous ~40% YTD gains (versus about an ~8% lift for the S&P 500), I think Yelp's valuation still leaves plenty of room for the stock to edge up further. At current share prices near $42, Yelp has a market cap of just $3.14 billion. After netting off the massive $595.6 million cash balance on Yelp's balance sheet (quite a substantial load for a company bringing in less than $1 billion in revenue, and giving Yelp ample firepower to invest in growth), its enterprise value is just $2.54 billion.
For the full year FY21, meanwhile, Yelp has guided to $985-$1.05 billion in revenue (13-15% y/y growth), and $150-$170 million in EBITDA:
Figure 1. Yelp FY21 guidance
Source: Yelp Q4 shareholder letter
To me, this EBITDA forecast feels a bit light, as it represents a 15-17% adjusted EBITDA margin. Yelp was able to drive a 19% adjusted EBITDA margin in a pandemic-impacted 2020, and 21% in FY19. In my view, assuming anything less than a 19% margin in 2021 is conservative (which translates to $189.1 million of EBITDA at the midpoint of Yelp's revenue range). Against this EBITDA outlook, Yelp would trade at just 13.4x EV/FY21 revenue. If instead we use the high end of Yelp's given EBITDA range, that multiple would stretch to 14.9x EV/FY20 revenue - which, in my view, still leaves room for upside.
The bottom line here: Yelp remains a strong consumer-driven company that has substantial revenue tailwinds in 2021 (from the reopening of its small-business advertisers) plus margin expansion opportunities as well (from a slower pace of hiring, limited primarily to its enterprise/multi-locatiom sales teams), and also one that is still trading at a fairly modest valuation. From what we've seen of the market so far in 2021, growth is out and value is in: so keep riding the Yelp momentum higher.
Q4 download
Yelp has already been showing strong signs of recovery in its most recent quarter. Let's now cover Yelp's most recent fourth quarter results in greater detail. The earnings summary is shown below:
Figure 2. Yelp Q4 results
Source: Yelp Q4 shareholder letter
Yelp was still in a state of decline in Q4, though the blow has diminished substantially. Q4 revenue declined -13% y/y to $233.2 million, beating Wall Street's expectations for $228.2 million (or a -15% y/y decline) by a two-point margin. The company's Q4 decline also moderated versus a -16% y/y decline in Q3.
Another way to look at Yelp's progress since the pandemic hit is sequentially. As you can see from the chart below, the gradual re-opening that has varied across states has also contributed to a gradual yet consistent recovery for Yelp - since Q2, the company's revenue has increased 38% and has almost returned to its pre-pandemic Q1 level of $250 million.
Figure 3. Yelp revenue trends by quarter
Source: Yelp Q4 shareholder letter
Yelp made concessions to its hardest-hit advertisers during the pandemic to reduce and defer ad payments; the company has since been rewarded by strong advertiser retention. Per CEO Jeremy Stoppelman's prepared remarks on the Q4 earnings call:
For those businesses and categories particularly hard hit by the pandemic, we extended approximately $37 million of COVID-19 relief in the form of waived advertising fees and free products and services in 2020.
Despite the difficulties that local economies faced over the last year, we are pleased that our efforts resulted in strong improvements in the retention rate for non-term advertiser budgets. This increased by 13% year-over-year in 2020 and ended the year up approximately 25% year-over-year in the third and fourth quarters.
Operationally, we accelerated our go-to-market mix shift towards Multi-location and Self-serve. Both channels have historically exhibited superior revenue retention characteristics compared to local sales. And as a result, we believe overall revenue retention and profitability will continue to improve as they make up a greater portion of our advertising revenue."
The last point on Yelp's go-to-market strategy is especially relevant for 2021. For smaller clients, Yelp has been increasingly relying on its self-service channel (aka, one that does not require a sales force to sell), while the company is actively looking at expanding its enterprise sales teams to capture multi-location, large franchises. This strategy should help Yelp not only with improved customer retention, but with margins as well.
As previously mentioned, Yelp's headcount reductions have helped the company to boost its margin profile. Despite the -13% drop in revenue in Q4, the company was able to maintain relatively flat adjusted EBITDA year over year, while margins jumped three points to 26%:
Figure 4. Yelp Q4 EBITDA trends
Source: Yelp Q4 shareholder letter
Key takeaways
There's plenty to like about Yelp as we head into 2021. Demand drivers for revenue growth in 2021 are obvious, as the company benefits not only from a re-opening of the U.S. economy but also a strategic push into enterprise/multi-location advertisers, where Yelp has already seen momentum. Yelp also notes it sees opportunities for long-term margin expansion, driven by a slimmed-down workforce, usage of less-expensive staffing locations, and a greater mix of larger, repeat clients.
Stay long here and ride the upward trend.
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This article was written by
Analyst’s Disclosure: I am/we are 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.
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