For much of this year, Yelp (NASDAQ:$YELP) has been quietly outperforming the rest of the market. In the past month, Yelp’s stock increased by more than 30%.
Who’s the hero?
Yelp saw an upward revision in the company’s revenue guidance for 2017. The company decreased its international operation to concentrate on local division in the US. As a result, its SG&A costs were expected to decline as a percentage of revenues. With all that being said, analysts are suggesting Yelp’s stock will boost upwards to $38, which is still below the current market price. Let’s break down the facts.
Local Ad Business to Grow at a Slower Pace
The local ads business create 76% of Yelp’s estimated value. In other words, the average revenue per active local business account, and the number of active local business accounts listed with Yelp are the key drivers of the sector.
- By the end of 2017, U.S. ad spending are expected to reach $149 billion
- Yelp has a total addressable market (TAM) of 20 million local business in the U.S
- But, the number of active advertising businesses who pay for Yelp’s services is only a fraction of this market at 148,000 in Q2 2017
- That means, Yelp can add at least 165,000 active business accounts by 2024
Growing Average Revenue Per Active Business
ARPALB is the driving factor in evaluation of local ad business. Yelp states that the monetization rate of a region increases with time as more businesses sign up for premium services.
- Yelp’s ARPALB improved to $11,322 for regions where Yelp started offering serves in 2005
- Yelp’s ARPALB is inticipated to grow over $6750 per year
Improving Profitability Set
Yelp’s main focus in achieving higher valuation will be in narrowing down on its operating expenses. Earlier in the year, Yelp saw high operating expenses due to their international expansion. Now that the company has exited that market, scale marketing expenses will decline from 50% of revenues to 39%. The result? Yelp’s increase in cash profits.
Be Aware of Competition
Despite Yelp’s first mover advantage in social local review services, there are various competitors on the market. Internet giants can easily leverage their data and experience to launch similar and competing services in the new future. As such, Google (NASDAQ:$GOOG) and (NASDAQ:$FB) already offer competing services.
Featured Image: depositphotos/zentilia
