Battleground Yelp

 | May 03, 2012 | 9:59 AM EDT
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Yelp (YELP) reported earnings last night. The stock is a real battleground for longs and shorts. There are currently 2 million of 15 million shares in the float held short, or about 14%.

It reminds me of similar long-short fights over stocks like Tesla (TSLA), LinkedIn (LNKD) and probably soon Facebook (FB). The shorts focus on the profits in the here and now. They seem to especially grow in the first couple of quarters after an IPO (relative to the past).

So, we got many Cassandras last night screaming that Yelp's loss widened. CNNMoney reported that "Yelp's net losses triple on expansion" as an example.  Some commented that Yelp's spending on sales and marketing, as well as general and administration, grew much faster than the current quarter's revenues. How can this be sustainable, the shorts ask?

The same things were and will always be said about high-growth companies.

The longs are seeing a land grab at work here. And they wouldn't want management to take their foot off the gas.

Yelp essentially offers a mobile-based yellow pages service in 82 markets (or cities) today. In 2011, it opened 22 new markets. It did the same in 2010. In the first quarter of this year, it opened 11, setting them to double to pace of openings this year compared to last year. In the current quarter, new markets included some in Australia and a couple in Europe. That's important because the vast majority of Yelp's current markets are in the U.S.

On last night's call, Yelp CEO Jeremy Stoppelman, said the company planned to focus heavily on European new markets in the second half of this year and Asia next year.

It has lots of runway ahead of it.  It sees 180 relevant (meaning with a population over 250,000) markets it could move into in North America and 1,000 internationally.

More important to the bull thesis are the economics of opening each new market.  Local revenues grow in a logistic fashion, although sales costs grow linearly.  In the early years of a new market, there are huge start-up costs getting sales staff on the ground reaching out to local businesses (shops and restaurants primarily) to claim their spots in Yelp. At this time, there's little revenue, usually $100,000 per year per new market in the first couple of years. But by year 5 in a new market, Yelp is seeing $6 million a year in local ad revenue.

Longs want Yelp to be opening as many new markets as is feasible now, because it's going to lead to a mushrooming of revenues in a few years from now.

One question shorts (and I) had before the call was monetization as more and more users shift over to using Yelp from a mobile device vs. a desktop. Yelp told us last night that 40% of its searches today are from mobile and this rises to more than 50% on weekends. This is only increasing. But Stoppelman said they were already seeing better monetization in mobile vs. PC as this shift happened.

Another big question mark on the company was referral traffic, specifically from Google (GOOG). Yelp and Google got in a spat a few years ago, first when Yelp declined to be acquired for $500 million and later when it was accused of scraping its reviews to beef up Google's own Places competitive offering.

Yelp says Google is still responsible for the majority of referral traffic. But Stoppelman cited Siri -- Apple's voice automated personal assistant -- as having given them increased prominence. And Yelp also noted the fact that increased mobile use was leading to more  users directly going to Yelp from its app.

Bottom line is that the longs are expecting exponential growth from the company.  They're not worried about burn this quarter but revenues. The best part of last night's call for them was the raised guidance for next quarter and the full year, as well as a promise to reach adjusted EBITDA break even for the year. 


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