Greenhaven Road Capital is bullish on Yelp Inc (NYSE: YELP), a local-search service offering hundreds of user-generated reviews of local businesses on its site. In Q2 investor letter, Greenhaven Road Capital discussed Yelp, noting that the company has the opportunity for revenue growth, margin expansion, and multiple expansion. Here is everything that Greenhaven founder and portfolio manager Scott Miller said about Yelp in the letter:
There are a number of parallels between Yelp (YELP) and TripAdvisor (TRIP), another holding of ours. Like TripAdvisor, Yelp helps connect consumers to businesses. Like TripAdvisor, consumers can make more informed decisions based on ratings and reviews from other consumers. Like TripAdvisor, the underlying Yelp community appears quite healthy with cumulative reviews up 22% y/y. Like TripAdvisor, Yelp is undergoing business model changes that have distorted recent financials. In late 2017, Yelp completed the sale of its money-losing but revenue generating “Eat24” food delivery business to GrubHub. GrubHub paid over $250M for Eat24 and now integrates with Yelp, providing high margin transaction revenue whenever Yelp’s platform leads to an Eat24/GrubHub order.
In this past quarter, revenue growth for Yelp was only 12%, but when adjusted for the sold food business, revenue was up over 20% on an apples to apples basis. The second change to Yelp’s business model has been underway for more than a year as the company shifts towards a more flexible contract model that allows businesses to turn on and off their ad spending as they see fit. Yelp’s previous twelve-month (annual) contract model was a vestige from when the primary competition was the Yellow Pages, which required a twelve-month commitment from advertising customers. Getting a small merchant to sign a yearlong contract and commit thousands of dollars of spending is no small task, requiring an extensive sales force. By shifting to a more flexible model, Yelp is trading the certainty of annual contracts for lower barriers to adoption with increased trial advertising by businesses. As an indicator of success, advertising accounts were up 27% year over year for Q2.
Similar to TripAdvisor, Yelp influences hundreds of billions of dollars of consumer spending but is under monetizing their traffic. One promising area is their “Request A Quote” feature, which allows a consumer to request quotes from multiple vendors without leaving Yelp’s site or app. If a consumer needs to power wash a 500-squarefoot deck, instead of reaching out separately to 5 contractors and describing the project 5 times, they can now write a single project description, review prospective vendors (including their average response rates and times), and request a quote from up to 10 at once. It is simply a better way to request a quote from the consumer’s perspective, and it is efficient from the vendor’s perspective as well. Clearly, Yelp will never extract the full value provided to home services companies, but, over time, high margin and high utility initiatives like Request a Quote are a promising step forward.
Yelp is led by its founder who owns $100M worth of stock. The company trades at less than 2.5x EV/Sales and is buying back stock, growing the top line at 20%, and pulling several levers to improve monetization and engagement. They should continue to benefit from operating leverage as revenue grows. The current balance sheet has $800M in cash, which allows the company to repurchase stock or make strategic acquisitions. Like all of our favorite investments, Yelp has the opportunity for revenue growth, margin expansion, and multiple expansion.
Shares of Yelp Inc (NYSE: YELP) have moved up 14.10% since the start of the year. The stock has jumped 24.21% over the past three months and 11.59% over the past 12 months. YELP has a consensus average rating of ‘OVERWEIGHT’ and a consensus average target price of $50.67, according to analysts polled by FactSet. The stock was closed at $49.20 on Friday.
Further, Yelp isn’t a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 26 funds in our database with positions in the company.