Yelp’s(YELP) Long-Term Goals Deserve A Glowing Review As Data-Driven Advertising Accelerates
5:41 pm Thursday, December 23rd, 2021
After experiencing a sharp sell-off in late November on heightened fears over a new COVID-19 variant, Omicron, the markets have since rebounded as positive reports on the effectiveness of current vaccination against Omicron started coming out. As a result, small businesses, particularly restaurants, may finally be looking at a complete comeback in 2022. That is why we want to highlight an addition to yesterday’s Value Leaders Rankings, Yelp (NYSE:YELP), which hosts crowd-sourced reviews on businesses.
YELP derives nearly all (~95% in Q3) of its revenue from advertisements posted on its platform, with ~60% on the Services side and ~40% on the Restaurants, Retail, & Other side. Following a year in which advertising fell through the floor as the pandemic shuttered businesses and hindered mobility, companies have accelerated the pace of their advertising spend in recent quarters. This is evidenced by the 52.2% yr/yr jump in revenues that YELP recorded in Q2, followed up with 21.9% growth in Q3.
Along with businesses increasing their promotional spending as COVID uncertainty begins to ease, YELP’s pursuit of additional strategies, many of which were part of the company’s transformation plan outlined in 2019, positions it for long-term growth.
We view this feature as necessary for small business owners to continue to grow, which should drive small business engagement on Yelp.
Furthermore, YELP pointed out in Q3 that it is only monetizing about a quarter of the leads flowing through its Services category, giving it sizable headroom to drive that number higher. That number was up from around 20% in 4Q20, signaling that progress has already been made on this front.
Lastly, YELP’s data is quite valuable, given the level of trust that users hold in its local content. In the past, YELP didn’t set its sights on chasing revenue with its third-party relationships. That has changed drastically over the past couple of years as YELP took to pursuing income through data licensing. For example, the company noted that its data will be available in around half of all new cars shipped in 2022.
We think data-driven advertising will be a significant source of revenue for YELP in coming years. Elsewhere in the industry, The Trade Desk (TTD) noted in early November that it is noticing a rapid shift to data-driven advertising as businesses continue to undergo digital transformations.
Overall, the sound results YELP experienced over the past couple of quarters are a bullish sign that YELP’s shift in focusing more heavily on its competitive advantages is paying off. YELP is still early in its sustainable growth initiatives, and the modest dip that the stock has recorded since November creates an entry point for buy-and-hold investors. The moderately attractive one-year forward P/E ratio of 15.5x also limits downside. As always, a stop loss limit of 15-20% is a good idea.
