Yelp Can Cook Up More Growth With Local Delivery Services

Yelp (NYSE:YELP) is one of the biggest local business listing directory in the U.S. and is fast becoming a de facto search engine for users who wish to make informed decision about availing services from businesses in their neighborhood. In a move to diversify its revenue stream, Yelp has expanded its services by introducing delivery platform to its portfolio. To start off, Yelp will offer food delivery services to users through its partnership with delivery.com and Eat24. However, Yelp plans to expand these services to encompass other categories such as spas, yoga studios, salons and dentist appointments going ahead. ^[1]

Yelp’s deal, partnership and other services (DPO) division contribute only 6% to total revenues. If these delivery services gain traction amongst Yelp users, Yelp’s DPO division can be an important growth driver going forward. Moreover, since these services also add value to existing active businesses by connecting them to users directly, we expect more free accounts to convert to paid or active accounts going ahead.

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How Does DPO Make Money

Yelp’s DPO division contributes 6% to total revenues and makes up 3% of its stock value. Currently, Yelp generates revenue from this division through any transaction that might occur on its website. Yelp’s deals platform allows merchants to promote themselves, and offer discounted goods and services on a real-time basis to consumers directly on Yelp’s website and mobile app. Yelp charges a fee on Yelp Deals for acting as an agent in these transactions. Additionally, Yelp also makes money through revenue-sharing arrangement with its partners like Open Table and Orbitz for any reservations a user might make on Yelps’s website. ^[2]

Delivery Platform To Fillip DPO Revenues

Yelp’s DPO division revenues grew by 270% in 2011 to $7 million, from $1.93 million in 2010, primarily due to increase in revenues from Yelp Deals and partnerships. However, the revenues increased at a slower pace in 2012 to $7.83 million, as competition from daily deal service providers such as Groupon and LivingSocial etc increased. The launch of its delivery platform has diversified Yelp’s revenue stream and extended its portfolio of services for DPO division. We believe these services will drive revenues at DPO division going ahead.

With the introduction of its delivery platform, Yelp has further reduced the loop between discovering a business on Yelp and making a purchase at that business. As users browse businesses, they can now place delivery orders with the businesses directly. This platform not only streamlines user experience with easy shopping on Yelp’s properties, but also supplements Yelp’s DPO revenues through transaction fee that Yelp charges for any orders placed on its website. Currently, we project revenues from DPO division to grow from $7.8 million to $17 million by the end of our forecast period. However, with delivery platform services revenues from this division can increase substantially. If DPO revenues were to increase to $56 million by the end of our forecast period, our stock price estimate for Yelp can increase by 10%.

Delivery Platform To Add Value To Local Business Division

The local ads business currently accounts for around 75% of Yelps’s stock value and is its biggest revenue source. The local ads revenue for the company has tripled in the last two years from $48 million in 2010 to $138 million in 2012. At the end of Q1 FY13, Yelp had nearly 1.1 million claimed business location or free accounts and 45,000 active or paid business accounts. Additionally, Yelp reported that it had 102 million monthly unique visitors in Q1 FY13. ^[3]

According to a survey conducted by Nielsen, four out of five Yelp users say they visit the site when preparing to spend money. ^[4] The delivery platform adds value to listed business, as now they can sell their products directly to users and easily quantify the revenue opportunity generated through Yelp. As perceived value added by advertising with Yelp increases, we expect more unpaid accounts will sign up with Yelp’s paid services. We, therefore, expect the number of active business account to rise. Currently, we project the number of active business account to increase from 40,000 in 2012 to 190,000 by the end of our forecast period. If the active business accounts were to increase to 240,000 by the end of our forecast period, our stock price estimate for Yelp can increase by 25%.

We currently have a $19 Trefis price estimate for Yelp, which is nearly 50% below its current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Introducing Yelp Platform! Transactions Made Easy, July 9^th 2013, officialblog.yelp.com [↩]
2. 10-K, Feb 27 2013, www.sec.gov [↩]
3. 10-Q [↩]
4. Nielsen: 4 out of 5 Yelp users visit the site when preparing to spend money, June 26 2013, biz.yelp.com [↩]