In a world that's increasing online, one would expect local online guides such as Yelp (YELP, Financial) to be smart investments. But, investors who had put their money in Yelp a year ago have seen their investment erode almost 19%. Although the company's performance has been very strong over the past four quarters, with an average positive earnings surprise of 83%, Wall Street isn't satisfied. But I think Yelp's drop is a buying opportunity due to a few simple reasons.
Focus on providing a cutting-edge experience
It is important for Internet companies such as Yelp to stay nimble and provide a good experience to customers. As a result, Yelp has been improving its features -- both organically and inorganically.
Under the inorganic way, the company has been expanding its frontiers by way of acquisitions. For example, after acquiring SeatMe, Yep has now launched a lighter version of the app. Now, this app will enable consumers to make online reservations at more restaurants through night life establishments. Features such as this will lead to more people visiting Yelp, and consequently lead to an increase in the number of advertisers. In fact, the company's new feature is already gaining good traction as it received a good response with more than 5,000 businesses using SeatMe for Yelp reservations.
Expansion into key markets
Yelp has acquired Restaurant Kritik, a restaurant review service in Germany, but the terms of the deal were not disclosed. This will allow Yelp to add German users to its existing fleet of customers, further boosting its top line. Now, Germany is a key market for Yelp, as the full-service restaurant industry in the country is expected to be worth 16 billion Euros by the end of 2018. Hence, it is important for Yelp to make the most of this market, and the Restaurant Kritik acquisition will help it do the same. In fact, Restaurant Kritik has more than 330,000 reviews on its site, covering 94,000 restaurants across Germany.
Yelp is also bolstering its position in France by acquiring Cityvox. It is one of the biggest review sites in France, having a user base of 130 million per month, and should definitely strengthen Yelp's position. The terms of the deal were not disclosed, but Cityvox will help Yelp attract more advertisers and reviewers as it focuses on the nightlife category in France.
In addition to the Euro zone, Yelp is also eyeing the Japanese market and intends to buy Tabelog, a restaurant guide in Japan. Tabelog has around 5.8 million reviews of nearly 790,000 restaurants across Japan, so it is easy to see why Yelp is aggressively tracking this firm. Although the deal is not yet final, but Yelp's intent of expand in Japan is clear from the launch of a Japanese language version of its website. Currently, the company is focusing on two major cities -- Tokyo and Osaka.
The encouraging part for Yelp investors is the fact that Tokyo is among the most expensive cities in the world, along with Paris, and Yelp is targeting both these cities. Now, advertisers might need to spend more in these cities to advertise on Yelp, given the cost of living. Hence, it is clear that Yelp is making the right move by expanding its presence in these markets.
Conclusion
Yelp disappointed investors last quarter due to a lower than expected fourth-quarter guidance. However, investors need to look beyond the short-term weakness as Yelp is riding on some key catalysts such as increasing Internet penetration and expansion into important markets. Thus, investors should consider using the stock's weak performance in the past year as an opportunity to buy the stock for the long run.
