Yelp Redux

Taking another look at Yelp

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I wrote about Yelp a few months ago. Although there was a lot of uncertainty at the time (vaccine efficacy was still unknown and, in the midst of a polarizing election, some were arguing that American democracy itself was being threatened), Yelp was in no danger of running out of cash, and it seemed cheap even by conservative measures if you assumed any realistic path of economic recovery.

I ended up selling Yelp after its price reached my idea of fair value, but have been following the company since. A few things have changed since my initial assessment of Yelp’s value:

  • Originally, I assumed that it would take until 2024 for Yelp to recover to 2019 revenue levels. Management now anticipates that they will hit this goal in 2021.

  • Management also thinks that they can hit “mid-teens” growth in 2022, which would be a marked acceleration from previous years, and really the first acceleration in revenue growth since they IPO’d nearly a decade ago.

  • I’ve learned to view management projections with a healthy dose of skepticism, but in this case some optimism seems warranted. While most people associate Yelp with restaurant reviews, 62% of their advertising revenue in 2020 was from “services” (home, local, auto, professional, pets, events, real estate and financial services). In Q1 2021, home services revenue was up 15% YoY, and Services revenue as a whole was up 6%. As the great reopening proceeds, their traditional restaurants business should also enjoy a tailwind.

  • The pandemic forced Yelp to aggressively cut their sales team and accelerated the roll-out of their “self-serve” advertising model. One knock on Yelp is that their salespeople are annoyingly aggressive. The shift to a more modern, self-serve model should ameliorate some of this antipathy, while also aligning Yelp’s long term product roadmap with advertiser needs (measurable return on ad spend), resulting in a more sustainable win / win business model. It should also increase margins by reducing staffing overhead.

  • I believe Yelp has a strong competitive advantage in the services sector, due to the higher quality and trustworthiness of their reviews, and that this fact is fundamentally underappreciated. 25% of reviews on Yelp are not displayed because their algorithm identifies them as potentially fake. This causes a lot of angst among business owners, and there is understandably some resentment as legitimate reviews are sidelined, but it is clear that Yelp is making a trade-off for long term credibility at the expense of short-term profit.

  • The CEO seems fanatical (in a good way) about the advantages that this trust engenders:

    ”[Consumers] realize that when they use Yelp, something is fundamentally different. The experience is consistently better. And I think that accrues to a long-term advantage.

    I mean just think about your own usage -- like my usage of Amazon over time has changed dramatically, where you -- like frankly, my perspective is you can't kind of trust anything about the experience at this point, especially the reviews component because, for whatever reason, they've just decided they'd rather maybe maximize business in the short run and police content only if they're forced to or if they're really embarrassed by it. And our attitude has always been put the consumer first, make sure that you're delivering as reliable and trustworthy an experience and use the tool of experience as possible. And that's hard to do, but that's what we believe. And we've always stuck to it, and I don't anticipate changing any time soon.”1

  • At least from personal experience, it’s hard to see the younger / Millennial generation using Angie’s List or HomeAdvisor. These sites seem like the Citysearch equivalent of home services (profiles lack social credibility, poor transparency, lack of rich multimedia content, short one-sentence reviews, aggressive lead-gen focus). Yet ANGI still earns ~3x the amount of services revenue that YELP does, and is growing more quickly. This seems more like an opportunity for Yelp than a threat, and at the very least hints at a large, still unaddressed TAM.

All of these factors have caused me to materially increase my valuation for Yelp, and I recently repurchased the stock.

The thing I also keep coming back to is, as a consumer, I keep coming back to Yelp. In the past few months alone, I’ve used Yelp to search for a handyman, appliance repairman and yard service. While traveling, I used Yelp to find nearby restaurants and cafes. At home, now that things are reopening, I’ve been using Yelp to discover “Hot and New” restaurants. Despite all of its faults, Yelp gets the job done, and I still haven’t found any superior alternatives.

There are certainly a lot of risks, but the fact that Yelp is so sticky is a hint that perhaps the business is more durable than it seems, and that its runway for sustainable, profitable growth could be a lot longer than I originally anticipated.

Disclosure: I am long YELP.

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