On Wednesday evening, Yelp (YELP) will report its first quarterly earnings since becoming a public company.
Analysts are expecting a loss of $0.15 a share and revenue of $25.3 million in the quarter. I would be shocked if Yelp doesn't handily beat those estimates. You would have to be brain-dead as a newly public company to do otherwise.
More important will be Yelp's guidance for next quarter. Analysts are assuming that Yelp will do $29 million in revenue and show a loss of $0.04 a share.
For the fiscal year, the expectation is that it will end up with $124 million in revenue and lose $0.19 a share, but that will jump to $177 million next year, with a profit of $0.06 a share. That's likely understated. That assumes somewhat linear growth in Yelp. It should be fairly easy for Yelp to beat that, though. It is a company set up for linear growth.
Yelp is the new Yellow Pages, with local business reviews and information. Its content is primarily user-generated, which means that it's cheap to generate. Just think of Instagram, which had 13 employees and was bought for $1 billion. At 13 employees and Amazon Web Services, why do you even need to raise venture capital?
The knock against user-generated content has been that it's tough to monetize. Looking at Yelp's past financials and the losses the company has incurred, you might conclude that the model doesn't work.
Yet Yelp is following a path very similar to that of LinkedIn (LNKD), building out the network first, then monetizing later. Beyond a certain tipping point, no one else is going to build a bigger or better network. From that point on, network effects will dramatically increase, delivering faster growth and profits.
LinkedIn's revenue, since 2007, went from $32 million, to $79 million, to $120 million, to $243 million and to $522 million last year. This year, it's on track to do $877 million in revenue and then $1.3 billion next year.
Yelp's revenue has, since 2008, gone from $12 million, to $26 million, to $48 million, to $83 million last year (estimated). Consensus is that it will do $125 million this year and $178 million next year.
This means that analysts are assuming that Yelp will not grow as quickly as LinkedIn. That may be why Yelp trades at a smaller price-to-sales ratio than LinkedIn: 16x vs. 21x. Yet, both companies trade at high premiums, because investors believe there is inherent future value in the networks that both are building.
If you continue to see Yelp ramp up revenue in the next two years to, say, $250 million by next year, then this is a stock that will be trading with a $5 billion market cap, not $1.3 billion. That translates into a stock closer to $85.
It might not get there.
Yelp's market capitalization is currently bite-sized at $1.3 billion, meaning that many larger companies will see it as a possible acquisition candidate.