Yelp Strengthens Its Asia Business With Malaysia Expansion

Yelp (NYSE:YELP) is one of the biggest local business listing directories in the U.S., and is fast becoming a de facto search engine for users who wish to make an informed decision about availing services from businesses in their neighborhood. While Yelp has been able to expand and effectively monetize its business in the U.S market, the company’s efforts abroad are still gaining traction. Until last year, the company was eyeing Europe and Latin America for expansion. However, it is now aggressively targeting the ASEAN (Association fro South East Asian Nations) markets as they account for  over 9% of the world population and 4.7% of world’s gross domestic product (GDP).

Yelp began expansion in this region with the launch of its operation in Taiwan in March. This month, the company has expanded its services to Malaysia. ^[1] In this article, we will discuss how this expansion will affect Yelp’s revenues in the near future.

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International Expansion To Boost Revenue

Yelp has been quite aggressively pursuing its international ambitions. While year 2014 was all about expanding its services to Latin America, year 2015 has been about expanding its services to the ASEAN region. We expect that as the company expands to new market, its revenues from local advertising should increase significantly.

According to our estimates, the local ads business makes up over 80% of Yelp’s estimated value. The key drivers for this division are the number of active local business accounts listed with Yelp and the average revenue per active local business account. As a result of this expansion, the total addressable market (TAM) size for Yelp has now increased to over 80 million. However, the number of active advertising businesses (i.e., the firms that pay for Yelp’s services) listed with the company forms just a fraction of this market at 90,200 in Q1 2015. Furthermore, the number of claimed businesses, which have a listing with Yelp but do not pay for any of the premium services, stands over 2.19 million. Considering that mature markets (regions where Yelp has been operational for more than five years) witness higher conversion rates from claimed businesses to active businesses, we expect strong growth in active business accounts. We expect that the base effect will limit the active business listing CAGR to 25%. However, for the company to sustain a higher growth rate, it needs to expand to newer geographies consistently. While we believe that the company can add at least 332,000 active business accounts by 2021, this number can be significantly higher if it continues to expand to other regions in the world

Furthermore, average revenue per active local business (ARPALB) is one of the most important drivers in our valuation for Yelp’s locals ads business. According to Yelp, the monetization rate of a city or region increases with time as more businesses enlist for premium services such as dedicated webpages and call to action to promote their products or services. ARPALB improved quarter over quarter from $5,049 to $6,865 for regions where Yelp started offering services in 2005, and from $375 to $506 for regions where Yelp services started in 2010. ^[2] However, as Yelp introduces its services in new regions, we expect ARPALB to grow at a slower pace as new regions such as Malaysia and Taiwan have less spending power compared to the U.S., and fewer businesses in these regions are willing to pay for premium Yelp services. We expect this trend to continue till the end of our forecast period in 2021, and project ARPALB to grow to $3,800 by 2021.

Challenges For Yelp

With the launch of services in Malaysia, Yelp is now operational in 31 countries. More importantly, it now caters to a country that gives it a foothold into the expanding Asean economies. However, the current sluggish macroeconomic conditions in Asean countries will negatively impact monetization rates of the websites across this region. Additionally, Yelp continues to invest heavily in sales & marketing and product development for its new markets. We expect that this will affect the company’s profitability in the short term.

Our price estimate for Yelp stands at $50.45, which is 32% above its current market price. We invite the readers to adjust the model and create their own alternative valuations.

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1. Southeast Asia’s Melting Pot Just Got Hotter: Now You Can Yelp in Malaysia, May 7 2015, www.yelp.com [↩]
2. Yelp Q1 2015 Investor Presentation [↩]