Will Yelp Ever Become as Successful as TripAdvisor?

After losing an astounding 32.5% in just slightly over a month, Yelp shares lead momentum stocks that have declined by the biggest margins in recent times. As a result of the huge sell-off, Yelp shares have been upgraded from neutral to buy at SunTrust and Oppenheimer, with both arguing that the company's fundamentals remain strong.

Yelp shares looked particularly vulnerable before the sell-off, trading at a price-to-sales ratio of around 27 (the company has no earnings yet). Even after the huge decline, the shares still trade at a considerable premium to peers OpenTable, Groupon, and Angie's List .

Yelp and TripAdvisor have a lot in common. Yelp is basically a business-review site. People post their reviews about many different types of businesses on the site. By the end of fiscal 2013, Yelp had accumulated 52.5 million reviews on its site. Yelp claims that it receives 120 million unique visitors a month.

TripAdvisor, on the other hand, is a travel-review site. People log in and post their reviews about different hotels, vacation rentals, and many other types of travel experiences. Visitors to the site read the reviews, after which they can then click through to actual online travel companies, such as Priceline and Expedia, and do their hotel reservations. TripAdvisor claims that it has 150 million reviews on its site and received 2 billion unique visitors last year. That works out to an average of 167 million unique monthly visitors.

Now, on the surface, both businesses appear strikingly similar. Looking at the number of unique monthly visitors, Yelp is not far behind TripAdvisor. But when you look at their top lines, you immediately notice a huge difference. Both companies rely very heavily on ad revenues. TripAdvisor finished fiscal 2013 with a net revenue of $944.7 million, the bulk of which came from click-based advertising ($696 million) and display-based advertising ($119 million). Ad revenue, therefore, accounted for 86% of the company's revenue, while the rest mainly came from subscriptions. Net income came in at $205.4 million, or a 21.7% net profit margin.

Yelp, on the other hand, finished fiscal 2013 with a net revenue of $233 million, and a net loss of $10.1 million. About 70% of the company's revenue came from ads, with the rest coming from subscriptions.

Digging deeper reveals that TripAdvisor's business model is far superior to Yelp's, with 47% of TripAdvisor's fiscal 2013 revenue coming from ads by Priceline and Expedia. The rest came from ads by the many hotels reviewed.

Having close to half of its revenue coming from the two top online travel agencies is a big plus for TripAdvisor, since it provides excellent revenue visibility for the company.

Yelp, on the hand, relies on ads from diverse businesses, mostly small businesses. Once a business is reviewed on the site, it can claim the ad. Claiming refers to the process by which businesses respond to reviews directed at them by users, by adding some information of their own. Yelp then tries to sell ad space to these "responsive" businesses. Although the site has 54.5 million businesses listed, only 1.5 million have claimed their listing. Out of these 1.5 million, only 67,000 were active advertisers in the last quarter.

In short, Yelp has a much harder time monetizing its content that TripAdvisor.

Lessons from Angie's List
Angie's List sports a business model almost identical to Yelp's, so maybe Yelp and its investors can learn some lesson from it. Yelp has been in business for almost 19 years and has never once turned a profit. Yelp has been in business for close to 10 years, too, and has similarly remained in the red. Both businesses were built on a model that presumed that if they built a huge following first, then the revenue, and profits, would later follow. While their revenues have been growing impressively, their bottom lines have not. And if Angie's List's case is any indication, it might not happen any time soon.

ln sharp contrast, it took TripAdvisor just three months to break even. From an initial investment of $4 million investment, the company has grown to a $12.4 billion giant, larger than even its parent company Expedia from which it was spun off two years ago.

Both Angie's list and Yelp have been growing their top lines at a blistering pace: Yelp grew its revenue by 69% in fiscal 2013 while Angie's List saw its top line expand by 58% to $245.6 million. TripAdvisor's revenue grew at a slower pace -- 24% for fiscal 2013 -- but, unlike the two, TripAdvisor is highly profitable.

TripAdvisor shares are quite pricey compared to its peers in the industry.

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