The fundamentals of a company aren't always represented in the corresponding stock price and, vice versa, the stock price isn't always reflective of a company's true value. In the case of Yelp (NYSE: YELP ) , the company has been firing on all cylinders, generating fast growth and expanding internationally. The stock, however, continues to experience extreme volatility, with price swings of more than 5% in both directions. Lately though, the stock has declined 20% after large gains earlier in the year.
Yelp competes in the heavily competitive online consumer review market and is attempting to grab the $133 billion spent on local advertising, particularly the $7 billion spent on Yellow Pages. It competes against other online companies such as Angie's List (NASDAQ: ANGI ) and Facebook (NASDAQ: FB ) for a share of not only Yellow Pages spending, but billions of other ad dollars spent on local avenues like television, billboards, and newspapers.
While the market is highly competitive, Yelp continues to gain market share even though the stock fluctuates. The following three numbers represent reasons investors should embrace the crash to obtain a more attractive entry point.
Huge local business market
The local business opportunity is so enormous that Yelp is only tapping a fraction of the potential market. In total, it is estimated that over 73 million local businesses exist worldwide, with 53 million in the U.S. and Western Europe. Only 1.3 million of those businesses have claimed listings on Yelp's website. Additionally, only about 57,000 local business owners advertise on Yelp, providing unlimited potential for more advertisers.
On the other hand, Angie's List has roughly 45,000 participating service providers or local businesses. Service provider revenue is growing at a 66% clip compared to the 80% growth rate of local advertising spending on Yelp. Even though Angie's List has a slightly higher revenue total, it only obtains $42 million from local advertisers due to the roughly $17 million it collects from membership fees. This discrepancy has allowed Yelp to become the leader in the sector and obtain a much higher market valuation.
Call to action
The call to action function on the Yelp mobile app provides businesses with local consumers who are potential immediate customers. The function has enabled 11.2 million unique mobile devices to perform 27 million clicks for directions and 19 million calls to businesses during the third quarter. The numbers have increased substantially in the last couple of years, with mobile usage leading to 62% of all searches on the Yelp platform. The mobile centric nature of the business should lead to strong advertising revenue streams.
The development of international markets will have a big impact on Yelp's future gains. Other Internet companies have had major problems expanding outside the U.S.
In the case of Yelp, international revenue only reached $3 million during the third quarter, for a 680% year-over-year gain. Helped by the Qype acquisition that provided consumer reviews in several key European markets, the company now has 21.5 million monthly unique users and 3.6 million cumulative reviews. If the company's international component reaches only 30% of total revenue, Yelp would quickly see a revenue boost to $77 million.
Angie's List hasn't made an international push, yet. Questions will abound whether that service can scale to foreign markets. Yelp is universally more open to international expansion because, at the very least, U.S. visitors to international markets are compelled to share reviews providing a natural audience.
As a social network, Facebook has the similar ability to scale internationally, with people connecting to friends in far away locations. A major concern for Yelp will be whether it can monetize local businesses in those locations better than Facebook has done. Western Europe monetizes at a level below 50% of domestic markets, and in the last quarter, the average revenue per user, or ARPU, in the U.S. and Canada was $4.85, while in Europe it was only $1.96. Additionally, the ARPU for the U.S. and Canada was $3.40 in the third quarter of 2012, suggesting that Europe might have more issues than just trailing the domestic total.
The recent crash in Yelp stock should be seen as a positive to long-term investors looking to purchase. The numbers from the company are far from suggesting anything but great times ahead. The mobile centric nature of the platform, plus the ability to grow the market and expand internationally, provides almost unlimited growth opportunities.
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