Bull, Bear And Base Case Scenarios For Yelp
Yelp’s (NYSE:YELP) has emerged as a de-facto search engine for local businesses over the past few years. However, over the past few weeks, the stock has outperformed the market as it has rebounded from the 52-week low of $20.50. While the recent return on S&P has been 8%, Yelp’s stock has grown by 24%. We estimate that with the existing growth rate and revenue run rate, the stock is fairly valued at $30.02. In this note, we explore the base, bull and bear case for the company. A summary of this is as follows:
EPS in 2022 Price Base Case $ 2.03 $ 30.02 Bull Case $ 3.22 $ 48.09 Bear Case $ 1.07 $ 18.51 Check out our complete analysis of Yelp
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The Base Case
In the base case scenario, Trefis estimates that Yelp’s stock is worth $30.02. While its local advertising business contributes 73% to the price estimate, Yelp’s brand advertising and deals division makes up 6.3% of the estimated value, with cash accounting for the rest.
The key drivers for the local ads division are average revenue per active advertising local business account and the number of advertising local business accounts listed with Yelp. 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. This translates into a global market of nearly $130 billion. However, the number of active business, which pay for Yelp’s services, listed with the company is just a fraction of this market at 104,200 in Q3 2015. Trefis believes that the active advertising business will grow to 359,390 or 4.5% of 7.98 million claimed businesses by 2022. Furthermore, average revenue per active local business (ARPALB), which measures the monetization rate of a city or region, would grow to $4,670.
Yelp continues to expand its portfolio through acquisitions such as SeatMe and services through facilities such as Call to Action, which lets a user place an order from Yelp’s platform. We believe that, as more businesses are added to Yelp’s platform, these services will have an additive and network effect on deal division revenues, which will increase from $23.92 million to $144.92 million by 2022.
The Bull Case: Stock Price Improves By 60%
In the bull case scenario, we estimate that Yelp’s recent expansion into international markets, coupled with the continuous recruitment drive to persuade more businesses to join advertising services, can help the company to improve the share in claimed businesses from 4.5% to 5.0% by 2022. This would translate into 480,500 advertising businesses for local ads division. Trefis also estimates that the ARPALB for the bull case scenario can improve to $5,449 by 2022 as cohort maturity plays an important part in improving monetization rate.
Furthermore, initiatives such as Call to Action and the assimilation of acquired delivery services into its platform together can help the company to achieve an improvement in its deals division revenues to $236 million by 2022. However, brand advertising revenue will continue to grow at the base-case rate as competition from other online companies should restrict the ARPU growth rate. Trefis estimates that if the bull case scenario were to pan out, its stock price estimate for Yelp can increase by 60% to $48.09.
The Bear Case: Stock Price Declines By 40%
In the bear case scenario, on the other hand, we estimate that intense competition would prevent the conversion from claimed businesses, which would also decline, to advertising business. As a result, the share in claimed businesses can decline from 4.5% to 3.89% by 2022. This would translate into 226,390 advertising businesses for local ads division. Furthermore, as the company is currently expanding into new geographies, the monetization rate can be negatively impacted. we estimate that the ARPALB for the bear case scenario can decline to $3,884 by 2022.
Furthermore, the bear case foresees lower growth from initiatives such as call to action and the assimilation of acquired delivery services (SeatMe, Eat24) into the platform. Thus improvement in its deals division revenues grows at a slower rate to $76.6 million by 2022. Given these factors, the bear case stock price estimate for Yelp will decline by 40% to $18.51.
At present we have a $30.02 price estimate on Yelp, which is inline with the current market price.
See our complete analysis for Yelp’s scenario
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