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Yelp Inc (YELP)’s Fortunes Will Turn Around: Tripadvisor Inc (TRIP), Facebook Inc (FB)

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Rapidly growing consumer review platform Yelp Inc (NYSE:YELP) has taken a few key steps that might turn around its fortunes in the near-to-medium term. Its platform has seen large increases in user traffic lately, and got a big face-lift as well. A growing number of users will help Yelp stand out even more in the highly fragmented consumer reviews segment. A few catalysts will drive the company’s earnings to positive territory in the future.

Yelp Inc (YELP)

1. Review Provider Turned Social Media Site

Just like many other investors and analysts, I too wasn’t convinced of Yelp’s business model, but my skepticism has diminished. Yelp has rapidly evolved from a standalone review provider to a growing social media platform. In addition, the site is increasingly getting users to engage with each other and contribute more to the site in the form of incremental reviews, photos, etc., which in turn drives more user traffic to the platform.

Yelp’s platform got more than 100 million visitors in January 2013, and these users are not only just reading these reviews, but also contributing heavily by adding reviews. The number of reviews on Yelp now stands at 36 million, excluding the content and traffic from Qype. One of Yelp’s bigger competitors for consumer reviews, Tripadvisor Inc (NASDAQ:TRIP), also has a huge content base of more than 100 million customer reviews.

However, TripAdvisor gets a large portion of its 50 million monthly visitors from Facebook Inc (NASDAQ:FB), which is not the case for Yelp. Yelp’s traffic is a lot more organic, primarily driven by its robust social network and the deep integration with Apple Inc. (NASDAQ:AAPL)‘s iOS 6.

TripAdvisor and Yelp are competing with each other for mostly restaurant and hotel reviews. Tripadvisor Inc (NASDAQ:TRIP) gets more than half of its traffic to its platform for hotel reviews, as it was previously a business division of Expedia Inc (NASDAQ:EXPE). However, Yelp’s user engagement in especially strong in the restaurant category, and the number of reviews are rapidly growing due to the transformation into a social media platform. The rapid transformation towards social networking also reduces competition from search giant Google Inc (NASDAQ:GOOG).

2. Key Platform Improvements

The life-blood of social media networks is the amount of user traffic that they can generate, and how engaged those users are. Yelp has made big overhauls to its platform, which made users a lot more engaged. It followed the path of bigger rivals Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD) in implementing a home page, which is just like the News Feed feature, which shows the activities, comments, reviews, photos, etc., of a user’s friends.

This heightened user engagement, while in its early stages, will surely gain momentum and create some big network effects. It will lead to users frequenting the site a lot more, and appeal to their network of friends. That being said, Facebook has built a huge moat around its business due to its unparalleled network effects.

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