Yelp Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Yelp is an American company that operates an online platform for discovering and reviewing local businesses, providing insights for consumers and marketing solutions for businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Yelp’s core business revolves around its online platform, which aggregates reviews and information about local businesses across a wide range of categories including restaurants, retail stores, home services, and health and wellness providers. The company generates revenue primarily through advertising, charging businesses a fee to feature their listings, offer promotions, and generate leads. Additionally, Yelp offers a range of solutions to connect businesses with their customers and generate new sources of revenue. Yelp provides a platform where consumers can:

  • Find and rate various local businesses
  • Read reviews, and view photos
  • Contact businesses directly
  • Explore deals, coupons, and specials offered by business
  • Make reservations with select restaurants.
  • Book appointments for salons and other services.

Recent Business Developments:

Yelp has significantly increased its focus on service-based businesses, particularly home and local services. To that end, the company is emphasizing user reviews, photos, and other content that provide richer context for these service providers. Further, Yelp is also providing tools that help local businesses manage leads, schedule appointments, and communicate more effectively with customers. As per recent news, in the third quarter of 2024, advertising revenues increased 14% year-over-year, with strength in multi-location and national accounts. The company is also showing some progress in improving operational efficiency, which has helped boost its adjusted EBITDA and operating cash flows.

Revenue Streams:

  • Advertising revenue comprises a lion’s share of Yelp’s total revenues, and its performance is highly dependent on the health of the advertising market and its ability to attract new customers and retain old ones.
  • Yelp also generates revenue through other channels, such as transaction revenue, which includes fees from bookings, appointments and other direct-to-business solutions.
  • The performance of all revenue categories is influenced by various factors such as seasonal spending, economic cycles, consumer behavior and overall economic growth.

Risks to the Moat and Business Resilience:

  • Intense Competition: Yelp faces significant competition from other online platforms and tech giants such as Google, Meta, Amazon, and TripAdvisor, which have more robust resources and a larger user base. The company needs to focus on differentiating its platform and strengthening its network effects to remain a competitive and relevant platform.
  • Market Saturation: Yelp’s business is largely concentrated in developed economies such as the US and Europe, therefore, in order to have meaningful growth over the next few years, it needs to penetrate emerging markets effectively.
  • Changes in User Behavior: Users can use multiple methods to search for businesses and services. This could be directly using Google, or a new search engine, or through traditional sources. User preferences change constantly, and Yelp might not be the go-to option for users.
  • Reliance on Reviews: A significant portion of its brand is dependent on user-generated reviews, which are often not consistent and may be biased or manipulated. Yelp has to find a mechanism to make sure their platform has authentic reviews.
  • Advertising revenue risk: As advertising is a major part of their revenue and that market is cyclical, their earnings can suffer if the advertising revenue dips. Also, the company’s ability to maintain the cost advantage over competitors in marketing and sales is important to achieve its goals.
  • Macroeconomic factors: During economic downturns or recessions, there might be a reduction in ad spending, which could lead to reduction in Yelp’s revenue. Moreover, changes in consumer behavior caused by higher inflation or cost of living can influence user activity on the platform.
  • Trust and Regulatory Environment: As a rating platform, Yelp needs to ensure all their data is unbiased and trustworthy. Increasing regulations regarding data privacy can lead to higher compliance costs and make doing business difficult.

Moat Analysis (2 / 5):

  • Intangible Assets: Yelp does have some brand recognition, especially in the restaurant and local services sector. However, other companies may have much stronger brands that generate high value from its customers.
  • Switching Costs: They are low for consumers, as they can very easily switch to another platform. While for businesses, the company is making it more integrated with their daily operations, which does lead to slightly higher switching costs.
  • Network Effects: Yelp benefits from the network effect. The more reviews there are for a business, the more valuable the platform becomes for users, and the more users there are, the more valuable the platform becomes for businesses. However, this effect is not strong enough to protect the company from its competitors.
  • Cost Advantages: Yelp does not have any significant cost advantage over other companies. They spend a lot of their revenue in sales and marketing to maintain its user base, while they are not making meaningful investments in long term assets.

Based on these factors, Yelp has a very narrow moat that may be eroded by new competitors that can do the same thing more efficiently or can add more features that are attractive to the consumer.

Financial Analysis:

  • Revenue Distribution: Yelp derives the majority of its revenues through advertising, with approximately 75% of the total revenue coming from advertising and other sources. The remainder comes from transaction revenues, which include payment for services or through other arrangements.
  • Margins: Operating margins for Yelp are fairly low. While cost of revenue is relatively low at 20%, operating expenses are still over 70% of revenues. However, the company is trying to decrease operating expenses through cutting general and administrative expenses, which will lead to more operational efficiency.
  • Recent Financial Performance (Q3 2024): As per the latest earnings results, Yelp’s revenue increased by 11% yoy, to $349 million. The company experienced strong revenue growth in the Advertising segment and good growth in Adjusted EBITDA and Operating Cash flows, signaling improving efficiency. In terms of guidance, the company projects revenue of $1.37 billion to $1.385 billion, an overall growth of 11 to 12% for the year.
  • Historical Financial Performance: From the reports, it can be seen that the company has struggled to sustain high growth rates and its profitability has always been volatile. While the company may be focused on improving user experiences and adding features, it is not translating to high returns for its shareholders.
  • Cash Flow: The company has a good history of generating healthy operating cash flow and are consistently doing well in this front, which is a positive for a long term investor.
  • Capital Expenditures: They are pretty low and the company is not a very capital-intensive business.

Balance Sheet Health (3 / 5):

  • Assets: Total assets stand at ~$2.3B. This comprises mainly goodwill, cash, marketable securities and intangibles. Goodwill and intangibles contribute a big portion of assets, which are highly dependent on its business operations and may be subject to fluctuations and impairment.
  • Liabilities: Total liabilities stand at ~$1.5B. Most of the liabilities consist of operating leases, long term debt and employee benefits. The liabilities for the company are reasonably high, considering the size of the business and the sector it operates in, which brings in moderate risk for a long term investor.
  • Shareholders’ Equity: Total shareholders equity is ~$800M, a good amount, but still a matter of concern considering its liabilities. There have also been periods of consistent share dilutions in the past, which may make it a concern for some shareholders.
  • Debt Structure: Long-term debt is about 800 million USD. The current ratio is about 1.1, which is a cause of concern. The company has also used convertible securities for financing in the past, which dilutes the stock if converted. However, they do seem to be handling the long term debt. Overall the balance sheet is on the okay side but can improve with the passage of time.

Understandability (2 / 5):

  • The core business model of Yelp, which is an online review and recommendation platform for local businesses, is relatively easy to understand.
  • However, there are many nuances in the overall working and how different sectors or business units perform differently, which may require detailed financial analysis.
  • Also, there are many complex details like different pricing strategies, ad placement mechanisms, and partnership structures that may take time to grasp fully. In the financial section too, there are issues with the way the accounting is done, that may take time to properly analyze.
  • Therefore, overall, the business model is understandable but requires some attention to understand all its complexities.

Conclusion: Yelp is a company operating in the online platform space for local businesses. While it has been successful for more than a decade, it still faces competition from bigger tech giants like Google and Meta and has to find a way to differentiate itself. As a standalone company in a challenging market, the business has a lot of potential but may also fade out to competition. The financial position, moat, and the understandability of the business has some areas that need improvement. Therefore, the company is not very attractive for long term investors, and needs to improve on some fronts.