How Yelp’s International Expansion Can Boost Its Revenues?

Most of Yelp‘s (NYSE:YELP) valuation can be attributed to its US operations. However, the company aims to have a strong footprint across the globe by 2020, and we believe that it has taken steps in the right direction. Nevertheless, international revenues continue to lag revenues from the U.S as both the number of daily unique browsers (DUBs) and revenue per DUB from international regions trail the U.S. The primary reason for this is that Yelp has added international regions recently and the company has stated that mature markets witness better monetization rates. As a result, we can expect strong growth in revenues from older international cohorts. However, continuous expansion would keep the revenue low, albeit the user base would improve.  In this scenario, we explore the effect of international expansion with a maturing cohort (from previous expansion efforts). To help our readers assess the impact, we have created a mini interactive model where they can modify Yelp’s  unique user base and monetization rate (i.e., revenue per DUB) its international target markets to see the change in the company’s international subscribers.  (Select grid view on top right corner for concise view of all drivers and output.) Readers can then leverage this generated change and apply it to our valuation model for Yelp  to see how it affects the price estimate. Our $30 price estimate for Yelp’s stock, represents a more than 20% premium to the current market price.

See our mini interactive model for Average Active Buyers forecast here

See our complete analysis for Yelp

Our Base Case Scenario For International Markets: DUB And Monetization Rate Remains Anemic

Although Yelp’s growth in the U.S. market has been stellar, its growth in international market has been anemic. As a result of its international expansion, the number of international reviews and traffic for the company has increased. While the company has grown over 40% year over year to approximately 30 million unique visitors on a monthly average basis, international reviews contribute 11% to the total reviews on the site. However, as Yelp introduces its services in new regions, we expect Average revenue per active local business (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. As a result, we expect that the blended ARPALB will grow at a slower rate in the coming years. This is reflected in the revenue per DUB in international regions, which has declined from $0.16 in Q1 2013 to $0.095 in Q3 2015. As Yelp adds more regions outside the U.S. territories, we expect that DUBs to increase to 44 million by 2017 at a CAGR of 4.15% (the average CAGR over the past few years), while revenue per DUB to decline to $0.069.

Potential Upside From International Expansion And Maturing International Cohorts

The past trend from Yelp’s sec fillings indicates that monetization rate for a mature cohort is higher than newer one. The company’s ARPALB improved to $8013 for regions where Yelp started offering services in 2005, and to $2234 for regions where Yelp services started in 2007-2008. ^[1] 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. Therefore, it is possible that international revenue per DUB (international) could improve to $0.30 by 2017.

Furthermore, Yelp’s expansion to regions outside the U.S. has given it access to nearly 1 billion users in Asia pacific, Europe and Latin America. ^[2] This is thrice the number of internet users in the USA (266 million). In the base case we project that its international user base will expand to 44 million in 2017. However, it is possible that as the company rolls out new services and internet awareness in regions such as Latin America grows, the DUBs in international regions for Yelp could increase to 100 million.

The cumulative effect of increasing monetization rate (revenue per DUB) and growth in user base could fillip its 2017 revenues by $100 million, resulting in an increase in contribution to total revenues to 8.4% from under 1% in base case.

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1. Q3 Presentation Slides, 28^th October [↩]
2. GLOBAL INTERNET REPORT 2015 [↩]