In this segment from MarketFoolery, host Mac Greer and senior analysts Andy Cross and Ron Gross review the latest numbers from Yelp (NYSE:YELP), which has been refocusing its content and business structure to better match what users and advertisers want.
In particular, it has shifted to offering much shorter-duration advertising deals, which make it a viable option for a larger number of small businesses. Apparently, it's working, because the metrics all look to be moving in the right directions. The trio consider both the company's outlook and the investment thesis for the stock.
A full transcript follows the video.
This video was recorded on Aug. 9, 2018.
Mac Greer: Shares of Yelp up 28% at the time of our taping on better than expected earnings. Yelp pointing to strength across their advertising business. Andy, I confess, I'm a huge TripAdvisor fan. I love TripAdvisor. When I think of Yelp, I think of it as a really sketchy TripAdvisor.
Andy Cross: Wow! That's pretty bold, Mac! Clearly there are a lot of people who disagree with you and use it.
Greer: I'm missing something here.
Cross: I don't know if you're missing anything. Here's the story with Yelp that I find really intriguing and refreshing. It's a $3 billion market cap. They have around $80 million in cash, no debt. Their revenue growth has actually been slowing over the last few years. Revenues in total this quarter up 12%. It's really the ad story that's been growing and changing at Yelp as they move to a much more focused on local business. And, they've been changing the way they structure their ad deals. They're now not structured in long-term. They're much shorter in duration.
They're pushing aggressively into changing the way that they go about selling the ad business, and that's really resonating with ad partners. Paying advertisers this quarter was up 31%. Ad sales up 22%. Paying advertisers up 31%. Reviews up 21%. There are reviews out there on Yelp.
They're really refocusing the business around what they're trying to structure for what their advertisers and clients want. Their product development spending is up 25%, but the general and administration expenses are up only 6%. They're bring the money in the right spot. You're seeing that with both the growth in the number of users and reviews growing, as well as the important advertisers that are paying for exposure to Yelp's reviews.
Greer: Ron Gross?
Ron Gross: I think the biggest thing going on here is, as Andy said, the move from requiring annual or even longer than that commitments from advertisers to monthly commitments that are good until canceled. You'll probably see a lot of smaller players move on, move off, test if Yelp is right for them. It's a lot more moving pieces for Yelp to manage, in that sense. But, if they can gain traction, they can then can move to smaller advertisers who perhaps couldn't afford the annual commitment up front or didn't want to make that commitment until they tested Yelp a little bit. This could revolutionize the model. I'm not necessarily sold on it. I'm not a shareholder, I'm not buying the stock anytime soon. But, it'll be interesting to watch.
Greer: Do either of you use Yelp? I'm feeling a little bad for using the word "sketchy."
Gross: You should feel bad.
Gross: But I do think there's a perception problem here. I was talking to a few different people about and bouncing the TripAdvisor-Yelp comparison off of them before our taping. I do think there's a sense that, maybe, people trust TripAdvisor a bit more.
Cross: That might be fair. I use Yelp all the time. I will use it just for quick searches, if I'm local someplace. Mobile is such a big part of their business and continues to be a really interesting part of their business. Pivoting away from usage and to the stock, it's not the fastest-growing business on the internet these days, but it's actually a relatively cheap stock. It only sells at 12X the operating profits they're going to do this year, and maybe 2X revenue. When you look at a lot of the other online properties, this one is pushing their profitability angle and spending a lot of time focused on growing that. They're buying back stock. I know the stock hasn't done so well recently, but they seem to be a business that's turning things around. That's at least getting my eye to be a potential one that's at least worth looking more into.
Greer: Even after today's pop, the stock trading around where it traded five years ago.
Cross: Yeah. They've had some struggles with reviews and trying to grow the business and making it more profitable, making it advertising friendly. To Ron's point, maybe we'll see some smaller advertisers come on, they might come on and drop off. They've been testing this for two years, though, so it's not like they're just going right at it without exploring it. They have the founder and CEO who's still running the business, owns $100 million worth of stock, so he's having a good day today. I think it's interesting, what they're doing. From the stock perspective, it's not an expensive stock.