U.S. Markets closed

Must-know: Understanding Yelp’s key ability to monetize its users

Martin Kurlandski, MS

Must-know: Understanding Yelp's enormous opportunity (Part 3 of 3)

(Continued from Part 2)

Yelp takes off

Yelp (YELP) stock has experienced an impressive run of late, outperforming social media peers such as Groupon (GRPN) and OpenTable (OPEN). The stock has returned roughly 217% over one year, reflecting the rapid underlying growth in user metrics and improving financial performance. These companies, along with the private Foursquare, have all created tools to support local business discovery, helping to match potential customers with local businesses or services. Yelp and Groupon are members of the Global X Social Media Index ETF (SOCL), which provides exposure to an index of social media stocks.

Addressable market

With the stock price close to all-time highs, many have referred to Yelp as a momentum name that lacks true earnings power, reminiscent of last decade’s tech bubble. As we discussed in Part 2 of this series, these concerns reflected in a stock price that languished following the company’s March 2012 IPO. Skeptical analysts—both then and now—appear to under-appreciate Yelp’s opportunity.

Through local business discovery, Yelp is attempting to address the local business advertising industry, which companies try to reach their potential customers to in order to generate sales. There are approximately 73 million local business globally that spend roughly $600 billion annually to advertise through a combination of online, television, newspaper, mail, and catalog channels. Yelp is attempting to capture a share of this massive market.

The chart above depicts the number of business accounts that advertise through Yelp’s platform. As the company nears the 60,000 mark for paying business accounts, it really has only penetrated a miniscule portion of the 73 million local businesses—about 0.1%. In the most recent quarter, the 57,200 paying accounts spent a combined $61.2 million to advertise on Yelp, for an average of $1,070 per account. Annualized, this translates to $4,280 per year. Consider if Yelp captured a full 1% of all local businesses, or 730,000 accounts. At this rate, the company would generate over $3 billion in revenue, compared to just $200 million in the last 12 months. This enormous opportunity is why the stock seems so highly valued compared to earnings. As Yelp continues to attract users and reviews, local businesses will continue to increase their ad-spend devoted to the platform and profits will grow in tandem.

Browse this series on Market Realist: