Groupon and Yelp, Hot Again

 | May 09, 2013 | 7:03 AM EDT
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Can the rally in Groupon (GRPN) be for real? How about Yelp (YELP)? These two companies have long been at the heart of trying to figure out what to buy and where to eat and where to stay. With this quarter just reported, these stocks have enjoyed a remarkable resurgence and surge, respectively, because of mobile -- and, more important, because of a pick-up in local commerce.

Yes, Groupon and Yelp have managed to harness two of the most important trends in business right now: the rise of the mobile app vs. the desktop, and the return of growth to the American consumer.

Now, I don't want to get carried away here. Groupon also has a sizable international business that is in decline, and there are real issues about whether this company is really making any money at all. In this seasonably weak quarter, Groupon was cash negative. Yelp has become, overnight, one of the most overpriced stocks in the book.

There are no real earnings, so there are no price-to-earnings ratios. But the core business metrics, like more couponing for Groupon, and more reviews for Yelp, are definitely headed in the right direction.

For Groupon that's huge news, because many people have thought the company may not even make it. Remember the lifecycle here. First it was a darling, then it was a dog, then it was a dead dog. The obituary had been premature, but it is still a dog.

Yelp, however, has a definitive pulse. It had accelerating revenue growth, or ARG, and that remains the holy grail of which we see so little. When we do see it, we tend to overpay for it because of its scarcity value.

Most of the Internet companies I follow -- indeed, most of the tech companies I follow -- have been hurt, and in some cases almost annihilated, by the migration from the desktop to the handheld.

Uniquely, though, these two companies benefit because they are leveraged to local commerce. In fact, I can't even begin to count how many times Groupon's new management used the term "local" in its preamble to the earnings call. Mobile usage now accounts to 45% of the business, up from 30% a year ago, and that conversion is what explains the 45% increase in North American business. The company made sure that everyone who listened to the call heard "local business experienced some solid sequential growth" -- because, and I quote, "We are a local company."

Yelp came armed with some real serious statistics about how local businesses have reaped outsized gains by signing on with Yelp. The average lift was $8,000 via a free business-owner account, with a $23,000 average gain if the business advertised with certain categories like auto, home and local service. The local usefulness explains how 36% of the users have found businesses via the Yelp mobile app, up from 25% a year ago. That's how you get local revenue up 81%, which in return gave Yelp a 58% year-over-year lift in revenue.

These are remarkable numbers from Yelp. They are a testament to how this company, even more than Groupon, is uniquely suited to the mobile model.

More important, though, I believe neither company could be doing as well as these numbers now indicate they're doing if the American consumer weren't going out more and shopping more. That gives these two companies both secular and consumer growth, which are the real reasons behind their surge.

Given that one-third of Groupon's market capitalization is cash, and the rate of decline has slowed, I can see why people might be willing to pay high single digits for the stock. I remain somewhat skeptical because, in the end, it still isn't making money. New management has clearly helped the cause, though.

Yelp, on the other hand, could break out to remarkable profitability rather quickly. But its nearly $2 billion market cap gives little room for growth, so it too might not have all that much upside.

Still, for the moment, they are hot once again because of their mobile and local qualities. That said, given the lifecycle of non-Google (GOOG), non-Yahoo! (YHOO) Internet companies, nothing's assured and nothing can ever be taken for granted.

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