Can Yelp Overcome the Google Threat?

Yelp has accused Google of favoring its own services. What does this mean for both business?

Jul 17, 2014 at 6:00PM

Online local guide Yelp (NYSE:YELP) has appreciated remarkably over the last year, with shares gaining 80%. The company's key metrics have improved rapidly, and its focus on mobile should help it sustain that outstanding performance going forward. However, Yelp has raised a concern over the way Google (NASDAQ:GOOG) (NASDAQ:GOOGL) lists search results, claiming the company gives preference to its own services. Will this hurt Yelp's growth significantly going forward, or should investors ignore this concern, given Yelp's mobile moves?

Focus on mobile is delivering results
A look at Yelp's product development indicates that the company is gradually becoming more mobile-focused. It is trying to deliver a better mobile web experience to users and has added a new feature through which users can add photos to Yelp via mobile web.

The company is experiencing strong engagement in mobile, driven by the investment it made over the past few years. Management credited Yelp's solid first-quarter performance to higher revenue from local advertising on mobile devices. The mobile app combines reviews and other relevant information based on the consumer's location, which allows them to check in at local businesses.

According to Yelp, in the first quarter, 35% of new reviews and 60% of all searches came from mobile devices. The company also bolstered its business listing page by increasing the number and size of photos. It improved review highlights to focus on the information that consumers will most likely find useful. On the back of such moves, Yelp is trying to increase organic traffic and improve its mobile business.

Yelp's moves have helped it deliver strong results so far. For example, in the first quarter, revenue increased 66% year over year to $76.4 million, which was better than consensus estimates. Yelp's losses also declined to $2.6 million from last year's $4.8 million.  In addition, Yelp also boosted its revenue forecast for the current fiscal.

These numbers reflect Yelp's solid progress. In the first quarter, 132 million visitors visited Yelp on a monthly average basis, indicating the strength of its user base . Active local business accounts increased an impressive 65% year over year to 74,000. 

Features and partnerships are proving beneficial
Management says that the Yelp brand is becoming synonymous with local search. Yelp has also tied up with other players to improve its presence. For example, it is powering Bing local search and Apple Maps, besides integrating its services into several car navigation systems. It recently announced plans to partner with Yahoo! and YP.com. 

Yelp is trying to make its platform better for advertisers, and it has launched certain products to address this. Last year, it had launched a new product, "Call to Action," which has gained popularity with both advertisers and consumers. It has been only a year since launch, and it is already generating around 100,000 leads for advertisers every week.

The company is continuously focusing on adding more features to its service to attract more advertisers. After acquiring Qype last year and integrating it into its platform, Yelp saw a significant increase in the number of contributors . In Germany alone, Yelp reported an increase of more than 350% in its contributors since October. More contributors will lead to more reviews, resulting in higher traffic, which will attract more advertisers to its platform.

Yelp has expanded its network to Mexico and Japan. International traffic grew 95% year over year in the previous quarter, and Yelp expects the trend to continue. The company is gradually trying to reduce its reliance on Google by making its own site feature-rich and aggressively promoting its mobile apps.

The Google threat
However, if Google is indeed altering search results to favor its Google+ and Google Places services, Yelp might be in for some short-term pain. According to TechCrunch, leaked documents from Yelp allege that Google is "blatantly highlighting its own products in searches made in the U.S., but not in Europe to avoid angering EU regulators who are reviewing Google antitrust complaints. "

A comparison between the growth in the number of businesses with reviews on Yelp and Google indicates that the search giant is cutting it close. As Fool contributor Adam Levy mentioned in his article, the number of businesses with reviews on Yelp was up only 3% last quarter, while Google+ saw a 2% jump. This is a point of concern going forward, and Yelp will need to continue innovating and aggressively pushing its own services to increase its lead over Google.

The bottom line
Yelp has done very well so far despite competition from bigwigs such as Google. The company's key metrics, such as active local businesses and mobile views, are increasing at a substantial pace, and it also increased its revenue forecast. Looking ahead, the company is expected to sustain its business momentum, as analysts expect its bottom line to increase at a compound annual rate of 72% over the next five years, making Yelp an enticing growth pick.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), 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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