YELP - Yelp Inc

[JayGatsby]

Not the typical value business but has anyone looked at Yelp? I didn't see a thread on it. I'm drawn to it because I really like the product and their valuation has beaten down pretty far

 

The good:

- I use their app all the time, mainly when I have the goal of of spending money

- Primary monetization now is through embedded ads and by restaurants paying for promotions (groupon style coupons or check-in offers)

- Business is cash flow positive and has $370M of cash ($1.3B TEV)

- Company is run-rating $540M of revenue. Revenue is growing ~50% YoY, with some verticals posting faster growth. Company is reinvesting heavily for growth, but if they slowed growth I don't see why $540M of revenue wouldn't cash flow ~$100M (13x PE)

- Acquisitions of Eat24 (similar to Grubhub / Seamlessweb) and SeatMe (Similar to Opentable but way cheaper for restaurants) both seem like good ways to help monetize traffic and provide methods to build engagement with customers

- I'd argue that having 83M reviews provides a pretty huge moat. Heavy users long history of reviews provides them credibility. Sure google has reviews of businesses, but I'm not sure people trust them.

- Not really a reason to invest, but the stock is down ~75% over the past year

 

The bad:

- They add back share based comp for EBITDA and have a share count that increases faster than you'd like

- Some people are critical that international isn't very big. Other people are critical that 80% of reviews are by 20% of the users (wrong percentage but you get the idea)

- The base business is free for everyone. Posting and reading reviews costs nothing and restaurants don't have to pay. You could make the same argument about Google but they've monetized search in a similar fashion.

- There's been some legal issues with businesses sueing reviewers for libel. States have started protecting customers rights to reviews. Although not a good thing it doesn't seem to slow down reviewers

- Some people allege that the whole business is a fraud and is just a method for extorting money from restaurants for better fake reviews... won't dwell on this too much but it's actually a frequent critisim.

- Some people say the barriers to entry are pretty low and Google will keep pushing into it. I think this is similar to Facebook/Google+ where it needs a critical mass of reviews / reviewers to be viable

 

 

[innerscorecard]

My main concern is that "local" is simply a bad business, or at the very least a much worse business than the great scalable internet businesses.

[nikhil25]

I think my challenge with Yelp is that it creates value for its users but is unable to capture part of that value. As a user, I love it and use it all the time. However, a few friends who own small businesses (restaurants) are not a big fan of the aggressive sales tactics used by the company and feel harassed and strong armed by the salesforce --- this isnt a good thing if Ads are the primary source of revenue.

 

I'll probably stay on the sidelines until they can find a sustainable monetization model.

[feynmanresearch]

I'll take a look at it.Thanks for bringing it to attention

[JayGatsby]

I think my challenge with Yelp is that it creates value for its users but is unable to capture part of that value. As a user, I love it and use it all the time. However, a few friends who own small businesses (restaurants) are not a big fan of the aggressive sales tactics used by the company and feel harassed and strong armed by the salesforce --- this isnt a good thing if Ads are the primary source of revenue.

 

I'll probably stay on the sidelines until they can find a sustainable monetization model.

What's the pitch from yelp? Spend money to take the ads off your page or you'll lose customers?

 

That's a good point and why I really like their acquisition strategy. Speaking only for restaurants, their monetization strategy historically wasn't very great (a good restaurant will show in the app as good and doesn't really need to spend money to get good placement, and why would a bad restaurant advertise that they're bad?). With SeatMe and Eat24 they have a clearer value proposition to restaurants. Their presentation says that last quarter people clicked the telephone button in the app 52 million times. My guess is of those calls to restaurants (based on my behavior) a lot were either to 1) confirm they're open or the wait time, 2) make a reservation, or 3) place an order for takeout. Now the salespeople can go to a restaurant owner, tell them how many calls they received through yelp, and pitch their services as a way to reduce call volume, make the customer experience easier, and fill seats / increase revenue. If i'm comparing restaurants it would be awesome if I could see how long the waits are and make a reservation. If I can click in to make an instant reservation with limited wait that could easily sway my decision. OpenTable's original pitch was obviously to help restaurants fill tables (now I feel like people just use it to collect points) and I think that pitch is even stronger for Yelp. SeatMe is way cheaper than opentable, which charges restaurants $1 per diner I believe. SeatMe is $100 a month, includes the reservation interface that the host/hostess uses, and doesn't charge for reservations. Once they have restaurant owners on the yelp platform and looking at the analytics dashboard, cross-selling ads and increasing share of wallet other ways becomes a lot easier (ultimately my guess is they want there to be paid ads on the search list that say "we have a table for you now. click to reserve.") SeatMe cost them something like $12M to acquire and Eat24 was $134M (although part was in stock and the stock is way down).

 

Side note, but the waitress at a restaurant I went to this weekend took the order on a tablet. It had no impact on my customer experience, but made her way more efficient because she didn't have to run to/from the register/kitchen to input orders. It probably actually cuts down on errors because the order is put in right there and there's no forgetting / misreading hand writing. This seems like something seatme could do pretty easily and either charge a small incremental fee or include it in their $99/month fee.

 

I meant to include this in the original post, but their investor pres is worth the quick read: http://www.yelp-ir.com/phoenix.zhtml?c=250809&p=irol-irhome

 

Not part of the main discussion, but I've been hedging by shorting facebook... way higher multiple and seems to have declining engagement based on a couple metrics. That's for a different discussion though.

[Guest Grey512]

I'm short, as a hedge against some of my other 'tech' holdings.

 

Not a fan of the business model, in general. Capturing new customers and growing revenues for Yelp is a tough, brutal process that requires effective, experienced staff; at the same time, Yelp is at a structural disadvantage from Internet portals with higher traffic and less reliance on a human sales staff (a good portion of whom at Yelp are always leaving and need replacing + expensive training). Also, don't forget that there is tons of capital flowing into the sector and constantly disrupting it, e.g. OpenTable (for restaurant reservations).

And I have also noticed the share count creep.

 

[Guest Grey512]

Also: PCLN is better than Yelp in almost every way. Undemanding valuation (20x forward P/E). Moat. Network effects. More diversified. More global. Demonstrated ability to spot and make good acquisitions. Significantly less share count creep.

 

Unless one is speculating on Yelp getting acquired by some other company, I see little reason why Yelp is an attractive long-term holding.

Because of the M&A take-out risk, I've sized by Yelp short very modestly.

[ratiman]

This guy agrees with you.

 

http://mahesh-vc.com/public-spotlight-yelp/

 

"I can easily see Yelp doing $2B revenue several years from now with close to $1B of EBITDA.  A business like this would be worth far more than $3B."

[Guest Grey512]

Thanks for the link. Some thoughts:

 

1. The cohort analysis that the author cites is interesting. As a short, the high growth rates (e.g. +50% top-line on an LTM basis) are certainly a concern. This (along with the M&A risk) is a reason why although I'm short, I do not recommend this short to others unless you have it as a hedge against some other name.

 

2. Near the beginning of his post, the author cites high valuations achieved by other marketplace businesses. That's just plain weird. Not sure what any of that has to do with Yelp as an investment proposition. Anyway.. moving on.

 

3. Agreed that Yelp has a good audience and a decent body of reviews but again, a lot of capital going into that area. Priceline via Opentable is one example. Yelp's "restaurant moat" is not long-term sustainable, IMO.

 

4. I wish there was a longer discussion of risks. Some 'marketplace' businesses sound high-tech but actually require a big sales force that needs to do its job well, i.e. retain existing customers, find new customers and convert them by explaining to their leads why Yelp is awesome. And Yelp has to do this in the midst of intensifying competition, high staff turnover, and increasingly sophisticated clients who demand that you show them that Yelp achieves an ROI for them that is higher than what they could get with other services e.g. Opentable, Google, etc.

 

5. M&A risk: yep. At $1.2b TEV, the risk is increasing. I opened my original short position when the TEV was north of $2b.

 

6. In any case, the author works at Redpoint and Redpoint is a big VC; the author presumably spends >60 hours a week thinking about tech and these kinds of business models (something that I don't do) so it's worth taking whatever he says under serious consideration.

[PatientCheetah]

Thanks for the link. Some thoughts:

 

1. The cohort analysis that the author cites is interesting. As a short, the high growth rates (e.g. +50% top-line on an LTM basis) are certainly a concern. This (along with the M&A risk) is a reason why although I'm short, I do not recommend this short to others unless you have it as a hedge against some other name.

 

2. Near the beginning of his post, the author cites high valuations achieved by other marketplace businesses. That's just plain weird. Not sure what any of that has to do with Yelp as an investment proposition. Anyway.. moving on.

 

3. Agreed that Yelp has a good audience and a decent body of reviews but again, a lot of capital going into that area. Priceline via Opentable is one example. Yelp's "restaurant moat" is not long-term sustainable, IMO.

 

4. I wish there was a longer discussion of risks. Some 'marketplace' businesses sound high-tech but actually require a big sales force that needs to do its job well, i.e. retain existing customers, find new customers and convert them by explaining to their leads why Yelp is awesome. And Yelp has to do this in the midst of intensifying competition, high staff turnover, and increasingly sophisticated clients who demand that you show them that Yelp achieves an ROI for them that is higher than what they could get with other services e.g. Opentable, Google, etc.

 

5. M&A risk: yep. At $1.2b TEV, the risk is increasing. I opened my original short position when the TEV was north of $2b.

 

6. In any case, the author works at Redpoint and Redpoint is a big VC; the author presumably spends >60 hours a week thinking about tech and these kinds of business models (something that I don't do) so it's worth taking whatever he says under serious consideration.

 

Any change to your thesis? Its two new acquisitions are making Yelp a direct competitor to Grubhub and Opentable.

[johnny]

Down to an EV of ~850m. You still short? Even though the actual numbers of the business look terrible (you know, like a call-center fueled sales operation), I'm starting to seriously wonder why there wouldn't be a buyer here.

 

That said, the thing giving me the most pause about the company is, ironically, a slide on their own deck: slide 11 of their Q4 Presentation brags about the "Compelling ROI for local advertisers" and gives $267 in average monthly spend paired with $983 in estimated revenue. They brag about this "269%" ROI, but of course that's -revenue-. A small business needs a margin on that additional revenue of around 30% just to break even on that campaign. I assume a lot of Groupon-style loss-making "deals" are wrapped up in that $983 average too...

 

That said, they have one of the most widely penetrated mobile apps, period. In a world where Apple pays $3 billion dollars for a basic music streaming service, it is hard to accept that the dominant social review database is worth much less than $1.

[Guest Grey512]

It's now a coin toss. Buyout / no buyout. If no buyout - slow deterioration of value. I mean, after you strip out stock-comp, operating cash flow is negative. So I can't see myself getting very bullish here. But I'm not short any more due to the buyout risk. At this level, it's in the 'too hard' pile for me...

 

 

 

 

[johnny]

The stock comp is indeed unbelievable, especially for a company like this, I don't think the market for call-center employees is so competitive that they need to rain equity on them. I guess the question is what portion of this comp is just management opportunism (that can be cut in an acquisition) and how much is just market rate comp trying to hide from the cashflow calculation.

 

 

[LC]

I won't invest because it's essentially a protection scheme. They come to you and say "pay us $$ to remove bad reviews of your business. And by the way, your competitor down the street is paying us, so..."

[johnny]

I think that is a bit overblown. Advertising is always going to be an arms-race racket. I would say, from the small (but real) amount of experience I've had indirectly (I have a stake in a small business that runs a Yelp campaign that Yelp seems pretty averse to removing reviews even when you're dropping $500 a month on the platform. But if the ROI on campaigns is as bad as I think the presentation implies, it makes sense that partners are generally frustrated all the time.

[JayGatsby]

The big question to me is what is the lifetime value of a yelp customer? If it is similar to groupon where the sales are one time and the customers don't come back, then the enterprise value is pretty minimal. If the advertisers find value in it and stick around it has a lot of value. Renewal rates so far are pretty high ~77%. 

 

That said, the thing giving me the most pause about the company is, ironically, a slide on their own deck: slide 11 of their Q4 Presentation brags about the "Compelling ROI for local advertisers" and gives $267 in average monthly spend paired with $983 in estimated revenue. They brag about this "269%" ROI, but of course that's -revenue-. A small business needs a margin on that additional revenue of around 30% just to break even on that campaign. I assume a lot of Groupon-style loss-making "deals" are wrapped up in that $983 average too...

Most of their revenue comes from service business so should have gross margins well north of 30%. You're right though that people aren't getting close to a 269% ROI unless they get some repeat business.

[ratiman]

Down to an EV of ~850m. You still short? Even though the actual numbers of the business look terrible (you know, like a call-center fueled sales operation), I'm starting to seriously wonder why there wouldn't be a buyer here.

 

That said, the thing giving me the most pause about the company is, ironically, a slide on their own deck: slide 11 of their Q4 Presentation brags about the "Compelling ROI for local advertisers" and gives $267 in average monthly spend paired with $983 in estimated revenue. They brag about this "269%" ROI, but of course that's -revenue-. A small business needs a margin on that additional revenue of around 30% just to break even on that campaign. I assume a lot of Groupon-style loss-making "deals" are wrapped up in that $983 average too...

 

That said, they have one of the most widely penetrated mobile apps, period. In a world where Apple pays $3 billion dollars for a basic music streaming service, it is hard to accept that the dominant social review database is worth much less than $1.

 

Ha, I had the exact same thought. That's it? A less than 3x return? That doesn't sound so great, especially for a small business where I'd expect the effect to be larger. If you look at just the core business, annualized revenue is just $500M. As for the stock, I don't know what to think.  A Yelp/Groupon merger is interesting, you could fire half of the sales staff.

[ratiman]

This was on quora, from a former Yelp saleslady, on how to improve Yelp:

 

https://www.quora.com/As-of-February-2016-what-could-Yelp-do-to-turn-things-around/answer/

Improve self service ad options, make them more visible to business owners, and invest in marketing to business owners about these options on a grand scale using a smaller sales force and more sales marketing. Doing a better job of automating this will 1) increase sales by making more owners aware of the opportunities and 2) reduce overhead re: salaries, office space, etc.

 

I wonder why Yelp isn't doing this. Maybe the churn on self-serve is really high.

[Spekulatius]

The problem with the Yelp business model I that the ads not really doing much.  The best advertising for Yelp is A large number of positive reviews and those are free (if the product is good) the ads are not that relevant.

 

I am not sure about extortion, that would seem like it would get Yelp into trouble very quickly. I have found Yelp reviews mostly to be spot on and relevant if there is a large enough sample size.

[racemize]

I'm involved in a small business. 

 

Yelp is by far the most annoying people to call.  They call constantly about marketing.  They will not go away.  In fact, the owner of the business is actually scared to answer the call and tell them she isn't interested in the ads, because she believes (either from other owners or elsewhere, I need to ask again), that bad things happen if you are on their shitlist.  I don't know if I'd call it extortion, but there is definitely fear...

 

She's bought a set of ads once from them, maybe on promotion.  It might have helped, but I think Yelp does the advertising for her already because she has perfect reviews, as already mentioned here.  Among google, facebook, and yelp, Google still kills all of them on IRR of ads.

[JayGatsby]

The problem with the Yelp business model I that the ads not really doing much.  The best advertising for Yelp is A large number of positive reviews and those are free (if the product is good) the ads are not that relevant.

 

I am not sure about extortion, that would seem like it would get Yelp into trouble very quickly. I have found Yelp reviews mostly to be spot on and relevant if there is a large enough sample size.

As best I can tell a large % of their revenue comes from those Groupon-style $10 for $20, etc type coupons. I say this because most of their revenue is from non-restaurants (restaurants are ~14%) and when I go to non-restaurant pages there seems to be a big push for those types of coupons. I'm not sure if that's good or bad. I assume at this point that if companies are still advertising those coupons they're working. Their "core" restaurant business doesn't generate much revenue today, probably for the reason others have mentioned that the real advertising is free. Eat24 seems to be key to that so they can start generating transactional revenue (12.5% per sale). SeatMe is a nice addition as well although the revenue potential seems to be less ($100/month license).

 

Racemize, what kind of small business / what kind of advertising?

 

[racemize]

Massage therapy/wellness (I'm not directly involved, but I help out with finances and am around the decisions).  I think the ads she did were discounted ones (maybe 25% off?), but not as bad as Groupon.  (Incidentally, Groupon is pretty terrible for this business--it causes a huge loss almost every time and those customers don't come back)

[JayGatsby]

Thought I'd post an update here as the company's strategy seems to have evolved.

- Current run-rate revenue (last Q x 4) of $779M, vs $634M prior year (23%). QoQ local revenue growth slowed to 4.4% from 7.8% the prior quarter. Next quarter is guided to be roughly flat. This caused the shares to sell off ~25% since the earnings release. Full year is expected to continue to increase.

- Transactions revenue is now run-rating $66M. They paid $134M for Eat24 in Feb 2015, so if you assume there's a reasonably profit margin on this segment (if they can leverage shared sales resources), it seems to have been a good deal. It also likely drives engagement so has some contribution to the larger local revenue segment. This grew 19% YoY, although it's still less than 10% of revenue.

- Subscription revenue is now run-rating 6.8M. They paid $12.7M in July 2013, although there was probably more invested in development. Still seems like it has been an accretive deal.

- Acquired NoWait in March 2017 for $40M. NoWait does advance waitlisting for restaurants that don't take reservations. They also launched a payments feature last year that lets people pay the check through the app. Yelp participated in the last funding round (contributed $8M), so purchase is gross of their existing stake (cash contribution is less than $40). They didn't release revenue figures, but the number of restaurants would imply ~$10M of revenue. 

- Acquired Turnstyle Analytics for $20M in April 2017 for $20M. Turnstyle does the login page for free WiFi, but then applies analytics to that data and also collects email addresses / facebook / etc (presumably Yelp will add a "login with Yelp" option) that are used for marketing.

 

What's interesting is they're building an ecosystem that drives engagement with consumers, restaurants, and other small businesses rather than just being an annoying ad platform. When they're done integrating all of those they should have a platform that actually drives value for restaurants.

 

Hard to value. You'd hope if they stopped investing for growth tomorrow they could do a say 25% pre-tax profit, which tax adjusted would have them at say 20x earnings. Their churn is 20%, which implies that if they stopped investing in sales people completely the revenue would decline. Not sure if there are any logical acquirers. They still add back stock based comp to Adjusted EBITDA which annoys me.

[villainx]

Thanks for the update.  I like Yelp out of a lot of the 3.0 Web companies because ... well, because I actually use it and find it useful.  Have been looking at entry, but could never figure out 1) whether it'll be viable AND successful and 2) the entry point.

[JayGatsby]

Thanks for the update.  I like Yelp out of a lot of the 3.0 Web companies because ... well, because I actually use it and find it useful.  Have been looking at entry, but could never figure out 1) whether it'll be viable AND successful and 2) the entry point.

Potentially an entry point here. What I didn't see was sequential core organic growth completely stopping! In the call they pointed to a lot of positives in the works, particularly Request-A-Quote, but I guess time will tell. The traffic metrics were actually really good, but they didn't convert to revenue. Current (tomorrow's) valuation is ~2x sales. That's in line with what Angie's List (which has negative sales growth) is getting bought at, although that doesn't mean it's a fair value for Yelp.

 

If you compare Yelp to Google, Yelp seems to be a lot more focused on selling, while Google focuses on getting the best experience for their users and their advertisers. For example, if I click on "Thai Restaurants" right now (10:00PM) I get an ad for a cuban sandwich place 7.5 miles away and a burrito place 13 miles away. Likelihood I go to either of those now is ~0%. Why not hit me with an ad for a Thai place that's still delivering? They seem to have an aggressive sales force that sells low quality, low ROI, high churn rate ads. I've done advertising on Google and never went through a sales person.