Yelp: Will "Closing the Loop" Lead to Impressive Share Gains?

Yelp is "closing the loop" with businesses as a means to attract new advertisers

Apr 9, 2014 at 10:50AM

With the markets giving us whiplash these days, Yelp (NYSE:YELP) wants to help you take a relaxing spa day. The local business review site, which has seen its own share price fall precipitously recently, announced it's teaming up with Booker to help customers set appointments at spas and salons.

The news in and of itself is nothing special, but it represents another step in the direction management wants to take Yelp -- namely, what it calls "closing the loop." That means guiding the user from discovery to purchase and every step in between. In this way, Yelp is competing with companies from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) to OpenTable (NASDAQ:OPEN).

The Yelp platform
Yelp is working to establish itself as more than just a reviews site. It wants to be seen as a platform that businesses can use to improve sales. To that end, management has forged several partnerships and made a few acquisitions over the past few years, including one with OpenTable.

Yelp partnered with the reservation service in 2010, but three years later the company purchased OpenTable's competitor SeatMe and officially rolled out Yelp Platform. Although Yelp hasn't ended its partnership with OpenTable, the SeatMe acquisition points to a desire to end the agreement sooner rather than later.

Yelp has also added the ability to schedule deliveries and pay for orders through partnerships, and now it's added the ability to make appointments for spas and salons.

All this is done in an effort to attract more advertisers. With more features, Yelp can gather more data; with more data, Yelp can improve ad targeting. That will allow businesses to see a higher ROI and Yelp to increase revenue.

At the end of last quarter, Yelp had over 67,200 advertisers on its platform. The market is significantly larger, however, with 1.5 million businesses claimed on the site. Converting claimed businesses into advertisers is one of the biggest challenges for Yelp, and providing more data to advertisers is one means to attract more business.

Google wants local business too
Google wants advertising business regardless of the size of the company. The search giant launched its City Expert program last year, which competes directly with Yelp. It leverages the Google+ platform, to attract more user reviews of local businesses. Google can then use that data to sell more advertising to those businesses.

What's more, Google is able to leverage its position as the leader in search to offer its own local results ahead of the competition. A search for "chinese food" on google.com will yield a banner of local results with average ratings and prices.

This puts Yelp in an awkward position because it relies on Google to attract people to its website -- especially on the desktop. On smartphones and tablets, where the mobile web is utilized much less than stand-alone apps, Yelp derives just 22% of traffic through mobile search.

To hedge against Google's potential products in local advertising, Yelp has partnered with Yahoo! to improve the latter's local search results. Yelp, in return, ensures that its site is featured prominently on one of the biggest web portals.

Will it work?
Since officially rolling out Yelp Platform in July of last year, Yelp added about 16,000 net new paying accounts in the second half of last year. Some of that increase came from its acquisition and subsequent integration of Qype, but a lot is organic. It will take some time to determine the effectiveness of Yelp's more in-depth strategy to attract advertisers, but the product first approach works well in the long term.

After falling from all-time highs earlier this year, Yelp trades for 20 times sales. Although that's a much higher multiple than Google or even OpenTable, which both trade with single digit sales multiples, its sales and profits are expected to grow at a much higher rate making it fairly priced.

If the Yelp Platform initiatives drive ad sales as management expects, Yelp could very well outperform its valuation.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), OpenTable, and Yelp. The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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