Domestic Strength
Despite these grand ambitions for expansion, Yelp’s core strength comes from local advertising. Yelp’s reach was greatly expanded by the popularity of Apple Inc. (NASDAQ:AAPL)’s Siri voice search, which uses Yelp as a default business search engine. This allowed Yelp to profit from local advertising, especially from smaller businesses. As a result, local advertising revenue soared 87% to $33.9 million, accounting for 82% of total revenue.
Mobile Strength
Yelp has a distinct advantage over its social media peers — while Facebook, Linkedin Corporation (NYSE:LNKD) and Groupon started on the desktop and migrated towards the mobile platform, Yelp’s business model was built for mobile access, since users will more likely search for restaurants on the go. Yelp’s mobile applications accounted for 46% of total traffic, used across 9.2 million unique devices monthly.
Yelp’s users are increasingly engaged in the site, as smartphones and tablets gain in popularity. Total reviews across Yelp’s sites rose 45% to approximately 36 million by the end of fiscal 2012. Average monthly visitors also rose 31% to 86 million.
To capitalize on this rising trend, Yelp introduced mobile ads in the fourth quarter — 25% of its local ads are now displayed on mobile devices. I believe that recent mobile results from Facebook and Google, which have shown significant growth in the mobile advertising market, are encouraging for Yelp’s mobile growth prospects.
Bottom Line
Looking forward, Yelp expects to generate $44 million to $44.5 million in revenue for the first quarter of 2013, in line with the average analyst estimate of $44.3 million. Still, that’s a big step up from the $27.4 million it posted in the first quarter of 2012.
If Yelp can maintain double-digit revenue growth throughout next year, it will still grow its top line at a faster rate than its drop in earnings, which will keep its head above water. While no one expects Yelp to be profitable right away, investors need to be aware that its rapid expansion plans, especially into international markets, will weigh heavily on EBITDA for several years.
Google and Facebook, with their sprawling mobile integration, should also be watched closely, especially in overseas markets.
Yet Yelp has a distinctive advantage over these competitors. Like Facebook, Yelp is is likely to remain on top of its market simply because most people are accustomed to using it. Thus, local advertisers will continue using it to reach customers. That extremely desirable snowball effect could lead to exponential growth down the road. For now, however, Yelp is a fundamentally risky and speculative bet.
The article Does Yelp Need Help? originally appeared on Fool.com and is written by Leo Sun.
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