How Is Yelp’s Local Ad Business Trending?

Yelp (NYSE:YELP) generates most of its revenues from local ads. While the total addressable market (TAM) for the company is over 20 million local businesses in the North Americas, the company has close to 4 million businesses on its platform. As a result, the company still has scope for growth in the local ad space, which is estimated at $149 billion in 2017. In this note, we explore how Yelp’s local ad business is trending.

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Local Ads Business Set To Grow

According to our estimates, the local ads business makes up over 76% of Yelp’s estimated value. The revenues for this business has grown by CAGR of over 48% from $194 million in 2013 to over $630 million in 2016. The local ad revenues are set to cross $770 million in 2017.  The key drivers for this division are the average revenue per active local business account and the number of active local business accounts listed on Yelp. As stated earlier, the company has a total addressable market (TAM) of over 20 million local businesses in North America. The number of active advertising business, which pays for Yelp’s services, listed with the company is just a fraction of this market at 155,000 in Q3 2017. While we expect that the base effect will limit the active business listing CAGR to around 10%, we believe that the company can add over 300,000 active business accounts by 2024. 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 4 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.
• 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 web pages and call to action to promote their products or services. The company’s ARPALB improved to $11,332 (15% y/y growth) for regions where Yelp started offering services in 2005, and to $929 (21% y/y growth) for regions where Yelp services started in 2010. Blended ARPALB has grown from $3,592 in 2013 to $4,572 in 2016. As Yelp’s services gain traction in the regions it operates in, we expect blended ARPALB to grow to $6,755 by 2024.
•  Mobile App Adoption To Drive Revenues: Yelp’s mobile app continues gain traction as users increasingly use the app to find restaurants and other businesses while on the move. In Q3 2017, Yelp’s app was installed on over 30 million devices, and its reach on mobile was close to 34%. Furthermore, over 70% of page views for Yelp came from the mobile app. 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 that adoption of Yelp’s mobile platform will drive growth in traffic for Yelp, which in turn will lead to more businesses signing up. This should also help the company to improve its ARPALB.

Our price estimate for Yelp stands at $30, which is around 20% below its current market price.

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