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Breaking Down the Opportunity for Yelp Investors Today

Wednesday - 1/9/2013, 2:00am  ET

The rise of social networking has made a lasting and substantial impact on consumers and investors alike.

As most people know all too well at this point, Facebook led the wave of the so-called "Web 2.0" companies that made their recent debuts on the public markets. However, many of these companies in some way incorporated the notion of "social" into their business models, one of whom is local review site Yelp . Like many of its recently IPO'ed brethren, Yelp shares have sagged somewhat since they went public. However, that isn't to say that the site's potential has fallen by the wayside. In fact, the Fool recently authored a special research report on Yelp. We decided to include a brief except from that report in the text below. Enjoy!

The opportunity
Yelp is in a great place. It has become the brand that consumers associate with local eatery and bar reviews.

In the years before Yelp, most of the local resources were editorially guided destination overviews. From IAC's CitySearch to AOL's City Guide, reader comments took a backseat to professional reviews.

That has changed, obviously. A wave of sites including IAC's own UrbanSpoon and Yelp have put consumers in control.

It's paying off. Yelp's revenue has gone from $25.8 million in 2009 to $47.7 million in 2010 to $83.3 million in 2011. Yelp is targeting at least $136 million for 2012.

Cracking open the model's menu
Yelp breaks down its revenue into three general categories.

Local revenue is its most lucrative, accounting for the lion's share of Yelp's business. While 889,000 businesses have claimed their venues on Yelp, 35,500 of them -- up 82% over the past year -- are active local business accounts as of Sept. 30, 2012. Theses 35,500 businesses are paying Yelp for enhanced profile pages and for performance- and impression-based ads on the site.

These local businesses contributed 78% of the revenue in Yelp's latest quarter, making it a good thing that this also happens to be the fastest-growing segment of its business. Local business revenue has soared 81% over the past year.

Brand advertising follows with 16% of the top-line mix. As the name implies, this is display advertising that Yelp serves across its website and mobile app. It's not a very dynamic business in its present form.

That leaves the "other" category at less than 6% of Yelp's revenue. This is essentially the daily deals appendage that hasn't worked out for Yelp. Just as others have been weaning themselves off of the Groupon model, Yelp has transitioned from emailed missives of sponsored bargains to a self-serve Yelp Deals platform that now hosts roughly 40,000 deals. 

This article was originally published as Breaking Down the Opportunity for Yelp Investors Todayon Fool.com

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