Yelp Has Big Upside Potential

Yelp  is rapidly becoming the local search engine of choice around the world. The company's user base and total number of reviews are on the rise. In the last quarter, Yelp's accelerating revenue growth is evidence of the company's future potential. It is expanding its footprint in newer territories, and these strategic investments will translate into multi-year revenue growth for the company.

Metrics growing rapidly
In the last quarter, Yelp's top-line revenues surged to $71 million -- a year-over-year increase of 72%. The company's user-generated content, the reviews that Yelp gets from users, increased to 53 million reviews. And the number of unique visitors on Yelp's vibrant social platform rose to 120 million. Yelp has much more room to grow compared to social media giant Facebook , which has in excess of 1.2 billion users. Facebook has more than 25 million small-and-medium businesses with pages on its platform, but it is not a focused business directory site like Yelp, with user reviews and photos of local businesses. 

Yelp has made substantial progress on the monetization front as its paying business accounts increased 69% year over year to 67,200. And these local advertising customers are coming back to advertise on Yelp within 12 months, as the customer repeat rate in the last few quarters stood steady at 70%. 

The company's robust metrics are proving that Yelp's business model is working. The company mobile presence increased substantially to 53 million users at year-end 2013.

The high level of user engagement on mobile is a solid positive for Yelp because the company can more effectively monetize mobile users by using location data. In addition, the company's mature markets are showing strong growth in advertising revenue from local businesses.

Improving financials
After years of investment in order to build out the company's business, Yelp is inching close to profitability. Yelp was positive in terms of EBITDA in 2013. In the last quarter, the company's net loss narrowed to $2.1 million, and it should start turning a profit in the next few quarters. 

The company's core local advertising business grew 71% in the last quarter to $58 million, and its other services revenue, including e-Commerce, increased 51% to $3.4 million. Yelp's brand advertising business grew a whopping 85% to $9.2 million as the company managed to attract more national advertisers to its platform. As the company becomes more global, it will be able to attract more global brand advertisers, who typically have large advertising budgets.

Future growth
The company is getting a lot more traffic from the mobile web as well as its app, and Yelp disclosed that 30% of its new reviews are coming from mobile devices. And the company is monetizing this increasingly large group of mobile users as 47% of ad impressions are displayed on mobile devices. 

Yelp completed the integration of its Qype acquisition in late 2013, which grew the company's presence in Europe substantially. And the company intends to continue its geographic expansion from 24 countries and add newer services for its users, who are providers of content on Yelp's platform. Yelp's expansion plan and stellar growth of reviews and traffic show the large, addressable market to serve local businesses. And the company's expansion across more markets in newer countries will aid in developing a global brand. Already, 21% of its total traffic is coming from outside the U.S. 

Yelp had acquired a restaurant-reservation system called SeatMe in 2013, and integrated its functionality into its platform. And the Yelp platform is allowing customers to transact directly from the company's site, which is generating a lot of food orders every week. This transaction business can be a more meaningful contributor to the company's sales in the future. In addition, more than 1.5 million local businesses are listed on Yelp's sites, but only 67,200 are paying members, so the company can ramp up its efforts to convert these listed local businesses into paying customers.

The bottom line
Yelp has become the leading local guide for real reviews when looking for new information about some local business, and the company provides a real service to consumers. A mere 4% of its total revenues comes from International markets, and as the gap between metrics and monetization closes, the company will be a lot more valuable in the future.

In 2013, Yelp earned only 12% of its total revenues from brand advertising, but over time, the company can attract more advertising dollars from big-brand advertisers. Based on management's guidance, Yelp's top-line revenues are expected to grow 53% in 2014, and continued revenue growth will drive more upside in Yelp's stock price. 

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Ishfaque Faruk owns shares of Facebook. The Motley Fool recommends Facebook and Yelp. The Motley Fool owns shares of Facebook. 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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