Yelp (YELP): Huge Potential in Local Online Advertising
By Mike Cintolo, Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader
One growth stock that’s been base building but is starting to find life is Yelp (YELP), which I touched on in last week’s issue of Cabot Growth Investor. Here’s what I wrote.
“Yelp began life as a kind of interactive Yellow Pages, connecting local businesses with interested consumers. But the company’s platform is now used internationally for interacting with customers, including downloadable content and social networking. Despite years of enthusiastic investor support, YELP slipped lower during most of 2014 and 2015, right through February 2016. The stock started its rebound last February (supported by 30% revenue growth in each of the first three quarters of 2016), rallying from 15 to 43 in October 2016. Since then, YELP has been building a normal base with support at 35 and resistance at 40. We still like this story, and a big breakout would be bullish.”
“My main thought here is that fears of competition, which are what drove the stock down in 2014 and 2015, are now dissipating. Yes, there are challengers, but Yelp remains the company best positioned to benefit from the explosion in online local advertising—in fact, revenue growth has remained strong and margins are expanding.
“And here’s the YELP stock chart:
“After a 14-week, 26% deep consolidation, YELP is strengthening, and I’d love to see a decisive breakout (maybe on earnings, which are likely out in early February) to tell me the next upmove has begun. It’s certainly worth watching.”
Here’s what I wrote about Yelp (YELP) in late June when I recommended the stock in Cabot Stock of the Month:
“Earlier this month, I was in Washington D.C. at a conference, and one night I found myself with a group of colleagues at the bar in a very popular restaurant. But when we asked if there were tables available for dinner, the hostess told us the wait would be 30 minutes. “So I stepped outside, opened the Yelp application on my iPhone, and quickly found a perfect substitute just a block away that was not only less crowded but less expensive as well. When it comes to finding local businesses, Yelp is unbeatable.
“Then, last week, back here in Salem, someone drove by in a car and threw a Yellow Pages book on my front step. I threw it right in the recycling bin.
“In short, I’ve made the switch. With Google and Yelp and other specialized apps at my fingertips, there’s no reason to use the Yellow Pages anymore. Yet the Yellow Pages is still a $6.9 billion market in the U.S. and a $16 billion market globally! Eventually, that business—along with coupons and flyers—will dry up as we all go digital, and Yelp is likely to be a major beneficiary.
“Yelp launched its business in San Francisco in 2004, creating its name by combining and shortening the words “Yellow Pages.” The San Francisco market is now mature but still growing, and every market the company has entered since then—Yelp is currently in 97 markets in the U.S., Canada, Europe and Australia—has followed the same growth trajectory, though somewhat faster. In short, growth is predictable—and that growth is not slow! The group of markets launched in 2005-2006, for example, grew 59% last year!
“For revenues, Yelp depends on advertising, of course. Local advertising currently accounts for 70% of revenues, while brand advertising accounts for 21%, with the remainder coming from other services. And there are still many more advertisers to attract. In fact, of the estimated 53 million local businesses in the firm’s targeted regions, only 1.1 million have claimed their Yelp sites and just 45,500 are advertising on Yelp. So the growth potential for the company, which has no debt, is still huge.
“And as more business get listed, they will attract more Yelp users who become business patrons—one study showed that just having a decent presence on Yelp can boost sales by about $8,000, with that number tripling if it’s combined with marketing efforts. And as more of these users write anonymous reviews for businesses, their presence on the site will attract more advertisers, creating a self-reinforcing cycle similar to the one that once made giving away fat yellow phone books a profitable venture.
“But you can’t take a fat phone book with you when you leave the house, and with 45% of Yelp activity now on mobile devices, the future is clear. Yelp’s revenue growth rates are very healthy and cash flow is positive. Expansion activity has kept earnings in the red so far, but that should change in the quarters ahead: analysts are estimating earnings will hit $0.16 per share in 2014.
“Lastly, as I said at the top, Yelp is the hands-down leader in content and viewership and thus is the odds-on favorite to win as local advertising goes increasingly digital.”
I went on to analyze the chart, which had a very high-potential pattern at the time. Buyers who followed my advice and bought are now sitting on profits of more than 95%. (This is truly a bull market!)
But that doesn’t mean YELP’s ride is over, as the chart of TSLA should have taught you. Yelp’s story is very much intact, and there are still far more potential buyers of the stock than sellers. So I still like it, long-term.
But if you really want timely investing advice, I recommend you become a regular reader of Cabot Stock of the Month, where I recommend a new high-potential stock every month and keep you updated their progress every week! If you’d like to join my very happy and prosperous readers, click here.
So, instead of buying Apple, because of its past great products and past great history as an investment, what I recommend instead is trying to find the next Apple, the next great growth stock that captures the investing public’s attention.
That takes some imaginative thinking, and it’s easier to simply remember the past (see tip number Three above). But if you try, you might find something like the stock recommended below.
The company is Yelp (YELP). Here’s what Mike Cintolo wrote about it back on May 5 in Cabot Top Ten Trader.
“The company is becoming the 21st century, interactive version of the yellow pages; it’s essentially the de-facto search engine that connects local businesses with consumers who are ready to buy. One study showed that just having a decent presence on Yelp can boost sales by about $8,000, with that number tripling if it’s combined with marketing efforts. All of this is leading to more businesses signing up, which is attracting more individuals to the site, which is leading to greater and greater advertising opportunities. Revenue growth has been rapid, as has the growth in reviews (now 39 million, up 42% from a year ago), monthly unique visitors to the site (102 million, up 43%) and active local business accounts (45,000, up 63%). These days, much of the viewership is taking place on mobile devices, and Yelp has a burgeoning business in that area; 45% of the firm’s searches in Q1 came on mobile devices, and Yelp’s mobile app is used on more than 10 million devices. Today, most of the revenue is in the U.S., but the company now has operations in 21 countries (New Zealand is the latest), so there’s every reason to expect years of growth ahead. Earnings remain in the red, but that’s because management is investing; cash flow is already positive and the bottom line should hit the black during the next couple of quarters. With competition at bay (Yelp is the hands-down leader in content and viewership), we think this is a good, sustainable growth story.”
In sum, Yelp has a great growth story. Yet as a company, it has nowhere near the mind-presence or reputation of Apple. But as millions more people use its site, it might get there! And in that POTENTIAL for increased perception lies the potential for great stock performance.
So, you could simply buy the stock right here—it’s been holding nicely above its uptrending 50-day moving average—but you’d be on your own. What I recommend instead is that you take a risk-free subscription to Cabot Top Ten Trader, to get Mike’s latest insight on the stock, and many more like it. For details, click here.