3 Critical Areas for Yelp Investors

The rise of social networking has made a lasting and substantial impact on consumers and investors alike. As most people know all too well at this point, Facebook led the wave of the so-called "Web 2.0" companies that made their recent debuts on the public markets. However, many of these companies in some way incorporated the notion of "social" into their business models, one of which is local-review site Yelp (NYSE: YELP  ) . Like many other recent IPOs in its space, Yelp has seen its shares sag somewhat since it went public. However, that isn't to say that the site's potential has fallen by the wayside. In fact, the Fool recently offered a special research report on Yelp, and we've decided to include a brief except from that report today. Read on and enjoy!

The three areas you must watch
There are plenty of things that can go right for Yelp in the coming months and years.

Let's go over a few catalysts for potential growth.

Mobile is an opportunity: Smartphones are a threat to some online businesses, but it's a golden opportunity for Yelp. According to the company, it expects to be able to monetize mobile more effectively than desktop usage because it can target ads from merchants in the area. There's a great urgency to mobile usage on the go, and merchants would love to reach hungry customers when they're nearby.

Every second -- on average -- a consumer generates directions to or calls a local business from the Yelp app. A whopping 45% of all searches on Yelp are now being initiated on mobile devices, and that figure should continue to inch higher.

Expansion awaits both here and abroad: Yelp fortified its global positioning with the October acquisition of Qype. It may not have seemed like a big deal given the $50 million price tag, but it's Europe's leading site for foodies. It was available on the cheap because -- despite the heady growth -- it just wasn't profitable. Qype draws 15 million unique monthly visitors to its website with 2 million user-generated reviews. It's a sliver of Yelp's audience of 83.5 million monthly unique visitors checking out its 33.3 million reviews, but it's an incremental move that also nips a potential disruptor overseas in the bud.

Before Qype, Yelp was already a bit of a globetrotter. It has dining hubs established for 96 markets across 19 countries, and 43 of those markets are international destinations. However, that also opens the door for Yelp to continue to add domestic landing pages for new markets. Jacksonville and Albuquerque were recent additions. Yelp also broke into Asia by rolling out in Singapore in September.

There's a lot of claimed businesses that can be turned into customers: Yelp is doing pretty well, given 35,500 active customer accounts. It had just 19,400 paying merchants on its rolls a year earlier. Businesses are generally happy about their relationship with Yelp, as 72% of them reup with the website when their contracts run out.

However, 35,500 is just 4% of the 889,000 local businesses that have been claimed, and an even smaller percentage when you consider the local venue operators that aren't yet on the site.

Improving the penetration rate is important, and it shouldn't be all that difficult as Yelp becomes more pervasive with mobile users.

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  • Report this Comment On January 15, 2013, at 10:58 AM, JaiYen wrote:

    IMHO this analysis was very poorly researched and misleading. I'd point out that rather than touting the potential market for Yelp perhaps ask why after 8 years with virtually no competition that Yelp has only a 4% market penetration? To answer my own question, Yelp makes money from small business owners, not users. Search Yelp on the net and you will find that their brand ranks somewhere below Congress and head lice among small business owners. Competition from big players like Google has now increased and the future outlook for this stock borders from dismal to bleak. Yelp is a dog that any investor doing the slightest due diligence should strongly avoid.

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