Yesterday, Apple (AAPL) kicked off its annual developer conference in San Francisco. During Apple's keynote presentation, one company kept coming up over and over. Apple mentioned Yelp (YELP) so many times, I felt as if the stock would take off before the meeting was over. But it didn't. It just sat there.
To be truthful, I didn't think much of Yelp before the keynote, but now that Apple seems to be tightly integrating its technology into its smartphones, I decided to take a fresh look at the company.
Yelp, the local-business review site, reported first-quarter fiscal year 2012 revenue of $27.4 million, up 66% year over year. Although the company lost money, it lost less of it than in the quarter before. The company reported that 700,000 businesses were on its review platform, up from 606,000 in the fourth quarter. Average monthly revenue per active business was down 9% year over year. The company finished the quarter with average revenue per subscriber of $263, just below the lowest bundled subscription price of $300.
The company had 71.4 million unique visitors in the quarter, up 53%. Cumulative reviews were up 59% to 27.6 million. Yelp added 11 new markets in the quarter and is on track to meet its goal of adding 20 to 25 new markets in 2012.
Despite all the conference call high-fives, why does Yelp have only 27,000 paying customers? The company is supposedly disrupting the Yellow Pages, so why isn't its business larger? I know the company has been at this for only seven years, but why isn't it profitable yet? The reviews on the site are user-generated free content. How can Yelp not make money with free content?
According to the U.S. Census Bureau, in 2008, there were about 27 million small businesses in the U.S. and another 25 million in Western Europe, Canada and Australia. The company says its initial six markets, back when Yelp launched in 2005-2006, generated average local advertising of $1,977. Newer markets, such as those launched between 2009 and 2010, generated only $68. (My garage sale made more.) Management claims there is tremendous potential for revenue growth as those later markets mature. But is that really true?
For example, in my town, there are 12,000 registered dogs and only five dog groomers. And one of them I have a beef with. (She won't groom my old English sheepdog.) I know every dog groomer in my town. So how much local advertising can Yelp realistically get out of these types of small businesses in the suburbs? I can understand that people want local advice when it comes to larger cities, like San Francisco, Boston, New York, and Chicago. But I question whether people out in the suburbs really need a landscaper review. And name a local business in the suburbs that can afford to pay $300 a month to advertise his business on Yelp.
Didn't Open Table (OPEN) already take the restaurant reviews business? Isn't that where the real money is? And hasn't IAC/InterActive's (IACI) CitySearch been trying to make money from local businesses for years? How has that worked out?
Yelp has been in Philadelphia for almost five years and has only a little over $600,000 in revenue? Metro Philadelphia is among the top 10 largest metropolitan statistical areas in the U.S. The Philly metro MSA is just about equivalent to the entire population of the state of Massachusetts. And all that Yelp can squeeze out of a population of 6.7 million is $600,000? Doesn't sound very exciting.
Even with tight integration into the iPhone, it seems to me that Yelp's addressable market really isn't as large as the company claims. And of course, the stock valuation is out of whack too. According to the consensus estimate, the company won't make a profit until 2014. Right now, the shares are trading at about 36x earnings before interest, taxes, depreciation and amortization. (Or 112x times fiscal 2014 earnings, if you want to be optimistic and look ahead two years.)
In my opinion, Yelp needs to find more revenue fast, before investors give it a bad review.