The shift to mobile search is expected to have a profound impact on paid search. No longer are users searching only within browsers. Consumers now search directly in mobile apps like the one from Yelp (NYSE:YELP). The shift could have a profound impact on dominant paid search leader Google (NASDAQ:GOOG)(NASDAQ:GOOGL).
Research firm eMarketer estimates that mobile will account for roughly 86% of digital ad search by 2018, with Google maintaining a 64.2% market share. While impressive, the market share is expected to drop 18 percentage points from the 2012 level. With an estimated $28 billion up for grabs on mobile search within four years, the market-share gains won't come easy, but here is why Yelp appears worth every penny of its current $4.7 billion market cap.
In the report, eMarketer singled out Yelp as the app expected to lead the charge in taking market share from mobile search. The market has the potential for extreme fragmentation, with every little app having the ability to attract ad spending away from Google. The key is that consumers want to search only the activities of a particular app, instead of the whole Internet.
According to the research, Yelp is expected to see mobile ad search revenue surge 136% this year and another 84% in 2015. The growth nearly doubles the rates expected for Google, and it far outshines major competitors for local ad spending and reviews in YP, the yellow pages company.
Despite the fast growth, Yelp is expected to achieve only a 1.9% market share of U.S mobile ad revenue by 2016, and YP retains a 4.1% market share, even with substantial losses each year. The forecast is peculiar, with the majority of the market-share losses from Google occurring during 2013, possibly suggesting a level of bias toward the search leader that the recent results don't back up. It appears highly unlikely that consumers will stop the trend toward searching within apps, yet the forecast is for the losses to moderate to only a couple of percentage points a year before hitting a trough at 64.1% in 2015.
Recent results back up forecasts
The first-quarter results from Yelp back up the forecast, with total revenue surging 66% to reach $76.4 million. A lot of the growth came from mobile, with roughly half of monthly active users now on mobile, which equates to around 61 million a month and a 52% growth rate over the prior year. Maybe most important, Yelp saw mobile searches account for 60% of all searches during the quarter. Users continue to shift toward mobile, playing into the better capabilities of the mobile app to identify the best restaurants and stores in the local area.
Despite facing these tough market trends, Google produced 19% revenue growth for the first quarter. The biggest headwinds continue in the cost-per-click area, with a 9% decline in the first quarter. Part of the issue is that the high-dollar searches are heading to the restaurant requests on Yelp and other mobile apps, while Google keeps the more generic, low-dollar searches.
At a valuation of nearly $5 billion, Yelp might appear expensive to most investors until they dig into the potential of local search on mobile. The ability for the consumer-review site to take share from Google in mobile search is a near priceless capability that could push the stock higher for years. The stock is easily worth every penny, and probably much more down the road.
Mark Holder and Stone Fox Capital clients own shares of Yelp. The Motley Fool recommends Google (C shares) and Yelp. The Motley Fool owns shares of 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.