Today, we will examine one of the original marketplace darlings that has recently taken a beating in the public markets: Yelp.
Yelp was founded in 2004 and went public in 2012, trading at a market cap as high as $7.2B in early 2014. The company's market value has since been in decline, trading as low as $2.9B after the last earnings announcement.
Yelp is an interesting company to me because it's a real beast of a marketplace business. It astounds me that the public markets could value Yelp as low as $2.9B, particularly given some of the contrasting valuations that we are seeing in the private markets. Let's look at a few quick examples (all based on public data):
Instacart - worth $2B valuation and based on public reports did just over $100M in sales last year, but of course this is GMV and not true revenue which would be a fraction of this.
Houzz - worth well over $2B and while they don't disclose revenue, they are a monetization-light business, so likely generating a small fraction of Yelp's revenue.
Lyft - boasts a $2.5B valuation and actually has some heft behind the numbers at $1.2B of 2015 GMV, but their take-rate is probably just in the 10-25% range (and I'm sure nowhere near profitability yet).
AirBnB - rumored to be raising at $20B+ valuation and has revenue in a range that is actually comparable to Yelp's (and growing at a similar growth rate).
Note: This is by no means a knock on the aforementioned companies. I think each one is extremely interesting in its own right, and each has a different business model than Yelp going after a different opportunity. The purpose of mentioning these businesses is simply to give some context to Yelp's value in the public markets, now trading at a $3.3B market cap (up from it's $2.9B low due to acquisition rumors). Let's dive in:
Things to Like
- Financial Profile - In 2015, Yelp will do $572M of revenue, up 52% from the prior year, and is projected to grow at a similar rate going forward. This is a huge amount of revenue with a terrific growth rate, very impressive in a vacuum. The company also turned positive on an EBITDA basis in 2013 and will soon have 20%+ EBITDA margins, or just over $100M of EBITDA. This is line of sight for the company and does not require any magic to happen.
- Large and Established Platform - Yelp has 135M monthly uniques, over 2M claimed local business locations and 84k local advertising accounts. Yelp has already established a sizable platform with network effects and has achieved 15 straight quarters of 60%+ local advertising revenue growth. To say that Yelp is lacking in scale, growth and profitability would be dead wrong.
- Solid Operating Leverage - The business has demonstrated solid operating leverage over time with all of the key operating costs decreasing as a % of sales.
- Mobile - Yelp is truly a mobile story in that the mobile experience significantly adds to the consumer experience. Roughly half of their traffic and two thirds of their searches are from mobile. The company has hit a peak in desktop usage and thus overall traffic growth is starting to decelerate, but mobile is experiencing very healthy growth. Note: growth in mobile also has the added benefit of weening Yelp off of Google search reliance on desktop.
- Highly Strategic - We can argue over whether users prefer Google over Yelp, but the fact remains that Yelp is a powerhouse in the local space. TripAdvisor is the only other company that comes close to Yelp's level of reviews, listed businesses and advertising revenue, particularly when you look at Yelp's stronger categories such as restaurants.
- Downstream Transaction Aspirations - Yelp has been making strategic acquisitions and partnerships in order to offer more services beyond just discovery and move further down the transaction funnel. They have recently launched salon and spa booking (Booker.com partnership), restaurant reservations (OpenTable partnership, SeatMe acquisition), food delivery (Eat24 acquisition), hotel booking (Hipmunk), winery reservations (CellarPass), etc.
Revenue and EBITDA
Things to Dislike
- Competitive landscape - Google has emerged as a significant competitor, particularly with their acquisitions of Zagat and Frommers. Google is focused on having more integrated content deeper in their search results. Additionally, Google Maps increasingly has local business listings, review information, photos and more. Yelp also competes with mobile/local apps like Foursquare as well as content + review sites such as TripAdvisor and OpenTable. From an advertising budget perspective, Yelp also competes with Twitter (local ads) and Facebook (local ads).
- Google - Google accounts for 50% of Yelp's traffic (organic search results), which is a huge risk for the company (at least with regards to desktop traffic).
- Merchant pushback - The data shows that the market is still wide open in terms of addressable merchants, but there has been a lot of pushback by merchants and accusations of extortion and foul play. One way or another, selling an advertising product to merchants seems to be a grind.
- Deceleration of certain KPIs - While still growing at healthy rates, certain KPIs have decelerated relative to prior years (though still healthy growth). In particular, analysts pointed out deceleration in local advertising accounts (54% YoY growth in Q4 2014), claimed local business locations (36% YoY growth) and unique visitors (13% YoY) growth. All of these metrics have slowed down.
Additional Facts and Figures
Mark Mahaney at RBC recently did a terrific analysis on Yelp's opportunity. They had several key takeaways which I borrowed heavily from in putting together the below:
Consumer and Merchant Survey Takeaways:
On the consumer side, surveys reported that Yelp continues to have significant brand recognition and is thought of positively by consumers, though the perception of review accuracy may be slipping. There also appears to be increased competitive risk, especially from Google.
On the merchant side, 82% of businesses surveyed had heard of Yelp, yet just 7% had claimed their businesses. Of this, only 11% were paying advertisers. This is a huge, untapped opportunity for Yelp. It's also one of the biggest risks. We've all heard horror stories from some merchants, and true or not, Yelp clearly needs to improve the advertising experience for merchants.
Cohort Analysis and International Opportunity:
Yelp's oldest city cohort (SF, Boston, Chicago, LA, NYC, Seattle) is averaging $25M annualized run-rate revenue. If Yelp could monetize 100 of its 127 current markets at an average of $10M per market, or about 38% of it's oldest cohort's current run-rate, then Yelp would have ~$1b of top-line revenue (which happens to be where the Street is modeling 2017 revenue). Yelp's management has also publicly expressed belief that it's oldest cohort (2005-2006 cities) could eventually reach $100M revenue run-rates. Given this, there may be a scenario where Yelp's top 10 cities alone could generate $1B in annual revenue. Additionally, growth in international markets could provide a ton of upside.
^Look at that stable cohort growth!
Given all of the above, I can easily see Yelp doing $2B revenue several years from now with close to $1B of EBITDA. A business like this would be worth far more than $3B. To me, this is an obvious acquisition to any number of players wanting to get into the local space. I suppose only time will tell - best of luck to Yelp's tremendous management team!