Yelp Inc: A Long-Term Growth Story

Yelp has huge growth potential in the long-run. The large sell-off in the company's stock price is a great opportunity to pick up shares of the online site.

Ishfaque Faruk
Ishfaque Faruk
Apr 14, 2014 at 9:00PM
Technology and Telecom

Online business directory and review site, Yelp (NYSE:YELP) has been firing on all cylinders. The company's unique visitors, user-generated content, and monetization metrics are all growing at high-double digit rates. The recent sell-off of the company's stock could be a great buying opportunity for astute long-term investors.

Plans to go global
Yelp has been connecting users with local businesses for many years, and the company is now rapidly expanding its scale and growing its platform across new countries across the globe. It has already amassed 120 million monthly users to its platform, which includes 53 million mobile visitors as well. 

Yelp has much more room to grow relative to social media king-pin, Facebook (NASDAQ:FB), which already has 1.2 billion users. And Yelp is also well positioned in local, social, and mobile -- whereas Facebook's core strengths are in social and mobile only. 

The company just recently broadened its horizons in Latin America with its launch in Mexico. And also in the first quarter of 2014 it expanded in Asia with a launch in Japan. The company now operates in 26 countries across the globe and intends to have a much wider presence around the world. Having a bigger presence in more countries will lead to robust growth in user-generated content. Yelp ended 2013 with 53 million reviews of local businesses, a 47% year-over-year increase. 

Thriving engagement
Yelp has strategically transitioned itself to a social platform as users can interact with each other just like Facebook. And this social aspect of the company will make it a lot more valuable in the future. And since a large part of its user traffic is flowing in from mobile devices (including its app and the mobile web) Yelp should find ways to monetize these eyeballs. 

In the last quarter, Yelp had 47% of its total ad impressions on mobile devices and is well positioned to monetize future mobile users in newer Yelp markets. The company already has more than 1.5 million businesses listed in its growing platform. And the number of paying business accounts grew 69% year over year to 67,200. The penetration rate of active business accounts stood at roughly 4.5%, and has the potential to accelerate in the future. 

In addition, Yelp struck a deal with YP, the leading local ad solution platform, which connects businesses consumers across various mediums including online, mobile, and print. This is a big positive for Yelp because YP's local advertising networks can reach 90% of the U.S. Internet population. This agreement with YP will expedite Yelp's monetization of local businesses. 

Sell-off creates a buying opportunity
The company is improving all its key metrics, is very close to being profitable, and thus, its price multiple remains high. The recent large sell-off in Yelp's stock price was due to the company's heavy price multiples, but the company's outsized revenue growth rates warrant a valuation premium. Yelp saw its revenue grow 69% year over year in the last quarter and unique visitors also jumped 39%. Such impressive metrics suggest Yelp has a long way to go before it reaches critical mass.

Internet usage is being driven by mobile devices and the company has a stellar footing on mobile devices. Yelp's integration of its European counterpart, Qype has added a lot of content and expanded its presence. As it grows its footprint, it will also grow its user base, cumulative reviews, business listings, and the number of active business accounts. Yelp has laid the foundation for robust growth and its recent pullback offers an opportunity to pick up shares at a better entry point.

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