Why I Love Yelp
NEW YORK (TheStreet) -- Yelp(YELP) will report earnings tonight. It will be its first earnings call since going public.
I am long the company for several reasons:
1. Its growth is coming in bunches:
As of the end of last year there were 71 Yelp markets. The company added 22 last year and 22 the year before after adding only seven in 2009. There's a delayed effect in how a new market contributes to revenue -- in its S-1, Yelp reveals that markets founded in 2005-06 had average local ad revenues last year of $5.8 million, while the 2007-08 cohort had average sales of $1.1 million and the 2009-10 cohort had average sales of $143,000. That means that, between the three- and five-year mark post-launch, there's an explosion of revenue per market from almost $1 million per year in ad revenue to $6 million.
If you model it out, Yelp seems like a lock to do $113 million in local advertising this year. For the past two years, local has represented about 70% of their overall revenue (with brand ads and other services such as Yelp Deals -- a competitor to Groupon(GRPN) -- accounting for the rest). This suggests they're on track to do $160 million in revenues this year, not the analyst consensus of $124 million.
If you model out next year, Yelp seems on track to do $218 million in local ads next year and total revenues of $312 million. That's far ahead of the analysts' consensus of $177 million.
2. It is building a small-business social graph in which the data it owns are worth more than the ad revenue:
More important to me than the ad revenues Yelp can accumulate to me are the data. In the end, this information is the much more valuable part of its business and what will power its revenues three to five years from now. This data is going to power how ads and deals get served to consumers through mobile devices and smart TVs.