Yelp could shrink its way to greatness with GDP+ top-line growth
A utility-like marketplace wedged between megacap tech
YELP 0.00%↑ doesn’t have a great reputation and management didn’t do themselves any favors when they began forcing mobile users to download the app several years ago. Most people associate the name with a “charging for protection” scheme that’s effectively a tax on local small businesses.
Nonetheless, they continue to consistently grow their top line with operating leverage, while buying back shares against the backdrop of low expectations.YELP 0.00%↑ has quietly increased revenue by 264% from $377.5mm in 2014 to $1,377.3mm in the TTM. In 2023 their app was active on 31.9mm unique devices, down 3% y/y. Desktop had 36.3mm visitors, down 5%, and mobile web had 60.3mm, up 2%.
Top Line: In 2024Q2 the (home) Services segment, 65% of 2024Q2 revenue, grew by 11.3% y/y, offsetting the 2.6% decline in Restaurants, Retail & Other (RRO) to land at 5.9% in aggregate.
Expenses: The company went remote-first in 2022 and, in 2023Q3, CFO David Schwarzbach mentioned that product development hiring efforts are now focused outside of the U.S. SG&A went up 8%, while product development decreased 3.5% and G&A decreased 16.5%.
Bottom line (operations): $27.7mm NOPAT in 2024Q2 / $34.1mm in 2024H1. It looks like the second half of the year tends to be stronger. So let’s assume a $125mm annual run-rate. D&A is running at another $35mm+. $160mm would imply a 14.1x multiple with market cap plus a pristine balance sheet balance that’s also milking $348mm of cash + subleases.
Not a bad place to start. Cash aside, the market is pricing, say, 5% top line growth translating to 7.5% bottom line growth for the next 25 years, for a 12% CAGR.
I don’t have strong opinions about any of those assumptions, which makes me think that YELP 0.00%↑ is approximately fairly valued.
Upside:
Further cost-cutting / efficiencies
Apple recently integrated “request a quote” into Apple Maps. Alexa also uses Yelp as a default. Yelp is a wedge between the megacap tech companies.
DASH 0.00%↑ , UBER 0.00%↑ , ABNB 0.00%↑ , AMZN 0.00%↑ , EXPE 0.00%↑ , BKNG 0.00%↑ , AAPL 0.00%↑ acquisition target?
Value of local, structured review data for AI purposes
Game theory: just a thought, but if fewer RRO participate in paid advertising on Yelp, results could be more effective for those who do, leading to rebound effects. Similar to how UBER 0.00%↑ and DASH 0.00%↑ have trapped restaurants.
Benefit if ANGI 0.00%↑ goes under?
Lots of powder for buybacks if results continue to improve
Risks:
Macro exposure / timing — Yelp can stay lean and survive and potentially come out stronger on the other side, but the market would likely beat the stock up as confirmation that it’s a dying business model like GRPN 0.00%↑
RRO flop — why is population growing but we’re losing customers? Active claimed local business locations has been growing which means they are losing a large percentage share of businesses.
Services pivot sustainability / reputation risk— growth in services has been an incredibly timely pivot, with services now at approximately 2/3 of revenue. But it’s not clear how economically sensitive this segment is and how sustainable the customer base is. I scanned reddit and saw some complaints of fake / bot job requests and a “$2500 guarantee” for consumers that is apparently almost never honored.
DoorDash and Uber are underrated competitors by offering full-service solutions
Paying advertising locations in aggregate have been flat since 2019
ANGI 0.00%↑ or other competition intensifying?
Conclusion:
Although YELP 0.00%↑ has obvious risks, I think it deserves more credit for what it’s accomplished and the potential it could have as a wedge between major tech players and consumers.
This is hard to value but straightforward to monitor. I believe the market is generally skeptical given what is warranted from history of operating results. In particular I want to see GDP+ top-line growth and continued progress on cutting expenses. I plan to hold my current position but keep an open mind to sell if results worsen or my economic outlook deteriorates.