I was not too keen on shares of Yelp Inc. (NYSE: YELP) -- the online review service best known for its consumer critiques of restaurants and other local businesses -- when the company went public in March. All of the hype surrounding the offering set up an unreasonable opening valuation.
But I’m taking a second look at Yelp now that the stock has pulled back 50% from its post-IPO high.
Consumers are increasingly turning to social media for advice and suggestions. In one recent survey, 64% of the respondents said they go online to search for customer or user reviews, and 87% said positive information read online reinforced their decisions to purchase products or services. Yelp is one of the leaders in this space, with 71.4 million average monthly unique visitors in the March quarter, representing year-over-year growth of 53%. Revenue growth this year is expected to top 57%.
The Yelp IPO priced at $15 a share, above the expected range of $12 to $14, and opened for trading at $22. The stock surged to a high of $31.96 at the end of March before succumbing to profit taking and a big dose of reality. At the high, Yelp’s market cap of $1.95 billion was 14.9 times the 2012 consensus revenue estimate of $131 million.
The disappointing Facebook (Nasdaq: FB) IPO hasn't helped, causing a broad sell-off in shares of a lot of recent tech IPOs. Yelp on Wednesday traded to a post-IPO low of $16.03. With the market cap now down to roughly $1 billion, the forward price-to-sales (P/S) ratio of 7.8 is a little more palatable. On the 2013 consensus revenue estimate of $184.6 million, the P/S ratio is 5.5.
In 2011, Yelp’s revenues rose 74% to $83.3 million, with 70% of total revenue derived from local advertising and 21% from brand advertising. The company plans to expand in its current markets (mainly in the US, Canada, and Western Europe) by increasing the number of users, reviews, and advertisers. It will push into new geographies this year as it builds out its international sales force.
For the March quarter, revenue was up 66.1% to $27.4 million, above the consensus estimate of $25.4 million, driven by 91% growth in local advertising revenue. The number of active local business accounts advanced 117% year-over-year to 27,300, and the total number of reviews topped 27.6 million, representing growth of 59%.
The company added 11 new markets (including eight outside the US) in the latest quarter and is now in 80 markets. Yelp targets markets where the population tops 250,000, and there are approximately 1,000 of these worldwide, according to CEO Jeremy Stoppelman.
With global smartphone shipments expected to top 1 billion by 2015, Yelp obviously sees a large growth opportunity on the mobile side. In the March quarter, Yelp was accessed on about 6.3 million unique mobile devices (up 80% from a year ago); and 40% of Yelp searches were conducted from a handset or tablet, with this figure topping 50% on weekends. According to Stoppelman, Yelp’s mobile ads have even better monetization rates than those on its Website.
With Google (Nasdaq: GOOG) now featuring Zagat reviews (it bought the restaurant guide last year) free of charge as part of Google+ Local, there is some concern about increased competition. Zagat does add useful content to Google+, but it remains to be seen if users are engaged enough to offer their own reviews. And the jury is still out on whether or not the search giant’s fledgling social-networking effort will be able to sustain any real traction over the long term.
Meanwhile, Yelp has a solid user base, plenty of market-expansion potential, and a superior mobile offering.