As Growth At Yelp’s Local Ads Business Slows, Mobile Ad Growth Takes Center Stage

Over the past few months, Yelp’s (NYSE:YELP) stock price has plunged by nearly 60%. However, we estimate that Yelp’s stock is worth $30.29 based on the total addressable market (TAM) for its core local ads business. According to Borell Associates, in 2015 local digital advertising spending will hit $47.8 billion globally, accounting for two-fifths of the $115 billion local advertising market in the world, which includes internet, bill board and TV ads. ^[1] Furthermore, Yelp has access to over 76 million local businesses across the the USA, Europe, Latin America and parts of Asia. Considering the markets Yelp operates in, we expect that Yelp’s local ads business to grow, albeit at a slower pace. However, most of the growth for Yelp is expected to come from its mobile app as local mobile ads take center stage. In this note, we explore the factors that will help the growth in its local ads business, and why the mobile platform will provide most of the growth in the coming years.

Check out our complete analysis of Yelp

Local Ads Business to Grow, Albeit At Slower Pace

According to our estimates, the local ads business makes up over 73% of Yelp’s estimated value. The key drivers for this division are the average revenue per active local business account and the number of active local business accounts listed with Yelp. According to BIA/Kelsey, online local ad spending in the U.S. is expected to increase from $31 billion in 2014 to $35 billion in 2015. ^[2] As stated earlier, the company has a total addressable market (TAM) of 76 million local businesses in the world, of which 53 million are present in the Americas and Europe. However, the number of active advertising business, which pay for Yelp’s services, listed with the company is just a fraction of this market at 97,000 in Q2 2015. While we expect that the base effect will limit the active business listing CAGR to 30%, we believe that the company can add at least 359,000 active business accounts by 2022. The factors that will impact growth are as follows

• Mature Cohorts Conversion: The number of claimed businesses, which have a listing with Yelp but do not pay for any of the premium services, stands at over 2.3 million. Most of these businesses are in regions where Yelp has been operational for more than five years. Considering that mature markets witness higher conversion rates from claimed businesses to active businesses, we expect strong growth in active business accounts from these regions.
• International Expansion to Help With Growth: One of the key to Yelp’s growth has been its expansion in international markets, which not only increases the cumulative reviews on the Yelp site but also increases its appeal to advertisers and users alike. As a result, international traffic grew over 40% year over year to approximately 29.93 million unique visitors on a monthly average basis. Furthermore, the company said that revenue from international markets is expected to gain traction in the coming quarters as it monetizes regions such as cohorts in Italy which were setup three years ago. We expect this expansion spree to bolster the number of active business accounts on Yelp in the coming years. While we expect that the base effect will limit the active business listing CAGR to 30%, we believe that the company can add at least 359,000 active business accounts by 2022.

• Average Revenue Per Active Business To Grow :- 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 sign up for premium services such as dedicated webpages and call to action to promote their products or services. The company’s ARPALB improved to $7,749 for regions where Yelp started offering services in 2005, and to $546 for regions where Yelp services started in 2010. ^[3] However, as Yelp introduces its services in new regions, we expect blended ARPALB to grow at a slower pace, as new regions such as Latin Americas have less spending power compared to the U.S., and fewer businesses in these regions are willing to pay for premium Yelp services.

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Mobile Local Ads To Power Growth In The Future

Over the past few years, online mobile ads have come to the fore and displaced online desktop ads from the top position. As a result, more ad dollars are now budgeted for mobile ads and the allocation for mobile local ads has also increased over the past few quarters. In April 2015, BIA/Kelsey estimated that US mobile location-targeted ad spending would rise 56% this year, versus 37% growth for national (not location-targeted) placements. BIA/Kelsey forecast that mobile location-targeted ads would continue to outpace national placements in spending increases through at least 2019. It expects that ad spending is to hit $18.2 billion for national placement and $24.4 billion for mobile location-targeted ads.

Most of the users have a tendency to check up on local businesses, particularly restaurants, when they are on the move. As a result, Yelp’s mobile app has gained traction in the recent quarters. For example in Q2 2015 monthly mobile unique visitors outpaced desktop visitors. While the company reported nearly 83 million unique users for mobile app and web, the desktop user count was stagnant at 79 million. Furthermore, 55% of new reviews and 56% of the ad impressions came from mobile devices. Considering the rampant growth in the usage of mobile devices, we expect the mobile platform to become a major revenue driver for Yelp in the coming years. We believe adoption of Yelp’s mobile platform will drive this growth in unique visitors on the Yelp site, which in turn will lead to more businesses signing up for Yelp. This will also help the company to improve ARPABLB.

Our price estimate for Yelp stands at $30.29, which is 32% above its current market price.

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More Trefis Research

1. Report: Digital Now Represents 40% of Local Advertising Market, January 23 2015 [↩]
2. U.S. Local Media Forecast, www.biakelsey.com [↩]
3. Yelp Q2 2015 Investor Presentation [↩]