There are so many variables to take into account, both known and unknown, when trying to understand what makes businesses successful. One thing that I love to do is compare similar businesses where there are several common features between them. By understanding the similarities, we can better discern the differences and figure out which factors cause companies to diverge. One such case study can be done with Zillow and Yelp. Both companies were founded in the mid 2000's, have had fairly similar growth trajectories, and even went public around the same time. They are both classic two-sided, audience marketplaces that monetize by selling ad products to their supply base.
Despite the similarities, the two companies operate in very different markets. Yelp went after the entire local advertising category, while Zillow focused on the narrower real estate advertising vertical. In Yelp's IPO filing they cite 27M US local businesses that in 2008 spent $16B in online advertising and would spend $35B by 2014. Yelp went directly after this entire market that was rapidly shifting from offline to online. Zillow's IPO filing talks about the overall housing market in terms of hundreds of billions of dollars, but then they mention that there are 1.8M licensed real estate agents in the US that spent $6.2B on residential advertising in 2010. Of this $6.2B spend, only a small portion of this was online, probably between 10-30%. Thus, Zillow's TAM was easily an order of magnitude lower than Yelp's, perhaps more.
Despite Zillow's significantly smaller addressable market, they were able to drive just as much top-line revenue and growth as Yelp.
Both companies have also had similar levels of EBITDA over the years.
In the above charts, you will notice that things began to change around 2014/2015. Around that time Zillow merged with Trulia and really started to monopolize the market, causing revenue growth to accelerate even more. Given Zillow's favorable market dynamics, analysts starting forecasting 40%+ EBITDA margins for the business over time. Meanwhile, Yelp was really starting to feel the negative ramifications of going after a larger market opportunity. Because "local" is such an important category, other large players went after it as well such as Google and TripAdvisor, but also Foursquare, Facebook, OpenTable, etc. Additionally, Yelp is reliant on their key competitor, Google, for a big portion of their traffic. All of this has made Yelp's mission difficult. While Zillow has been able to successfully monopolize their market and thus garner leverage over their supply base, Yelp has been fighting tooth and nail with competitors and so have a less favorable relationship with their merchants.
And this clearly shows in the stock prices of both companies. Zillow has significantly outperformed Yelp since the 2014/2015 time period.
The whole story is not yet written for either company. It will be interesting to watch how each company navigates its respective market. It's possible that Zillow will eventually tap out their market and struggle to find growth, while Yelp may keep chugging away in a competitive market where multiple players become massive.
Investors and entrepreneurs often fall into what I call the "large market trap". Just because a category has a large headline TAM figure does not mean it is necessarily attainable. Market dynamics are far more important than raw market size.