How Will Yelp’s $134 million Acquisition of Eat24 Help Its Business?

Yelp (NYSE:YELP) is one of the biggest local business listing directories in the U.S. and is fast becoming the de facto search engine for users who wish to make informed decision about obtaining services from businesses in their neighborhood. While Yelp has been successful in expanding and effectively monetizing its business in the US market, the company’s efforts abroad are still gaining traction. Until last year, the company was eying Europe for expansion. However, it is once again focusing on improving its US business with the acquisition of  Eat24. The deal is valued at $134 million, acomprising $75 million in cash and 1.4 million shares of Yelp’s common stock. ^[1]

Earlier, Yelp was offer food delivery services to users through its partnership with delivery.com and Eat24. This acquisition strengthens its attempt to diversify its revenue stream, and penetrate deeper into delivery service market. Yelp’s Deal, Partnership and Other services (DPO) division contributes only 5.5% to total revenues. If Yelp can successfully integrate Eat24’s delivery services into its business, 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, they should induce more free accounts to convert to paid or active accounts going ahead.

Check out our complete analysis of Yelp

How Does DPO Make Money

Yelp’s DPO division contributes 6.6% of its stock value, according to our model. 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 arrangements with its partners like Open Table and Orbitz for any reservations a user might make on Yelps’s website. ^[2]

How Eat24 Can 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 an increase in revenues from Yelp Deals and partnerships. However, 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 growth resumed in 2014 as revenues grew by 100% from $12 million in 2013 to $24 million. Considering that the food delivery market in the U.S. is expected to grow to $20.8 billion by 2018, we believe these services will drive revenues at DPO division going ahead. ^[3]

Eat24 provides approximately 20,000 restaurants in over 1,500 cities nationwide with the ability to offer online delivery and takeout services. With the food delivery services of Eat24, Yelp has further reduced the loop between discovering a restaurant on Yelp and making a purchase at that business. As users browse restaurant, they can now place delivery orders with the businesses directly. This service  not only streamlines the user experience with easy shopping on Yelp’s properties, but it also supplements Yelp’s DPO revenues through transaction fees that Yelp charges for any food orders placed on its website. Currently, we project revenues from DPO division to grow from $24 million to $144 million by the end of our forecast period in 2021. However, with food delivery services, revenues from this division can increase substantially. If DPO revenues were to increase to $300 million by the end of our forecast period, our stock price estimate for Yelp would increase by 10%.

Eat24 To Add Value To Local Business Division

The local ads business currently accounts for around 80% of Yelps’s stock value and is its biggest revenue source. The local ads revenue for the company has grown by 2.5x in the last two years from $137 million in 2012 to $340 million in 2014. At the end of FY14, Yelp had nearly 2.02 million claimed business location or free accounts and 93,700 active or paid business accounts. Additionally, Yelp reported that it had 135 million monthly unique visitors in Q4 FY14. ^[4]

According to a survey conducted by Nielsen, four out of five Yelp users say they visit the site when preparing to spend money. ^[5] The food delivery platform adds value to the listed food business, as now they can sell their products directly to users and easily quantify the revenue opportunity generated through Yelp. Through Eat 24, Yelp will drive daily engagement in its key restaurant vertical.  It also plans to expand Eat24’s offering to the one million U.S. restaurants listed on its platform. As the 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 accounts to rise. Currently, we project the number of active business accounts to increase from 93,700 in 2014 to 423,000 by the end of our forecast period. If the active business accounts were to increase to 700,000 by the end of our forecast period, our stock price estimate for Yelp  would increase by 25%.

We currently have a $61.17 Trefis price estimate for Yelp, which is nearly 37% above its current market price.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Yelp Acquires Leading Online Food Ordering Service Eat24, February 10 2015, www.yelp.com [↩]
2. 10-K, March 03 2014, www.sec.gov [↩]
3. 100% Home Delivery/Takeaway in the US, November 2014, www.euromonitor.com [↩]
4. 10-Q [↩]
5. Nielsen: 4 out of 5 Yelp users visit the site when preparing to spend money, June 26 2013, biz.yelp.com [↩]