The performance of local search service provider Yelp Inc. (YELP, Financial) over the last year has been disappointing. Its stock has declined 14% versus a 1% rise for the S&P 500, while its profitability has fallen.
In response, the company is making changes to its strategy that could improve its competitive position versus industry peers. As part of this initiative, it is seeking to broaden its customer range through offerings at multiple price points.
Yelp is targeting large advertisers who continue to contribute the majority of total advertising each year. It is also seeking to replicate a successful partnership strategy with Grubhub (GRUB, Financial) in order to complement its organic growth prospects.
While the stock remains expensive despite its decline in recent months, it could have investment appeal.
Updated strategy
An evolution of Yelp’s strategy could provide it with an economic moat versus sector peers. As part of this process, the company is expanding its portfolio to include more products in a wider range of price points. This included the release of Yelp Verified License, which involves a client’s trade license being checked by the company. It has been offered to advertisers at a lower monthly rate of $30 since November 2018. Over 3,000 clients have added the feature since then, with a higher retention rate being recorded.
Additional products at different price points are expected to increase the appeal of the platform among a larger range of clients. The company has tested a 10% reduction in cost per click across the platform and believes it would lead to an $ 8 million increase in revenue as a result of a higher retention rate. It plans to invest in further innovation to maximize clients' advertising budgets, while presenting the best lead opportunities to highly-rated advertisers.
Improving the customer experience through greater personalization is also a key focus. For example, Yelp is enhancing recommendations by including personal customer insights such as dietary preferences that have been shared by mobile users. This is aimed at enhancing the appeal of the platform to a broader range of consumers, which could increase its relevance to a wider range of advertisers.
Investment in growth
The company plans to increase its appeal among larger advertisers since they made up the majority of the $150 billion spent on local advertising in 2018. To achieve this goal, Yelp is seeking to expand its go-to-market strategy and offer a wider range of solutions to larger advertisers. It is providing tools for national advertisers to manage their campaigns, while extending its attribution offerings and creating new ad units to drive consumer purchases. It also plans to increase the size of its national sales force, focusing its attention on the top 250 restaurant and retail advertisers in the U.S.
Alongside organic growth, Yelp is seeking to accelerate its partnership strategy. It has enjoyed success in this space through a long-term deal with Grubhub, which has increased the number of orderable restaurants on the platform by 100% and is generating more profit per order than the previous model. It is seeking to unearth similar opportunities, with recent deals including partnerships with Visa (V, Financial), GoDaddy (GDDY, Financial) and Alphabet's Google (GOOG, Financial).
Risks
Yelp’s profitability declined in 2018. Having recorded earnings per share of $1.76 in fiscal 2017, earnings declined to 62 cents per share in 2018. Though it is forecasted to report only a modest increase in earnings of 2 cents per share in fiscal 2019, the stock trades with a price-earnings ratio of around 60. This suggests it lacks a margin of safety as well as value investing appeal. Even when fiscal 2020’s forecasted earnings of $1 per share is factored in, a forward price-earnings ratio of 38 suggests the stock may be overpriced.
In response to its lack of near-term profit growth, Yelp is seeking to become increasingly efficient. Optimizing its cost structure is becoming an increasingly important focus, with the company set to put in place a variety of initiatives over the medium term. For example, it is reducing local sales hiring and increasing representative productivity, while also optimizing consumer marketing spending to save $15 million in 2019. This is expected to lead to an improved earnings before interest, taxes, depreciation and amortizaton margin over the medium term, which could help to justify its premium valuation.
Verdict
With a number of changes expected to be put in place, Yelp’s financial performance is expected to improve significantly. Earnings are due to rise 50% in fiscal 2020, with a strengthening competitive position having the potential to drive profitability higher.
The scope for the company to sign additional partnership agreements, while winning new business among large advertisers, could catalyze its financial performance. Meanwhile, new products at different price points may help to make the platform more popular.Ă‚
Having trailed the S&P 500 over the last year, the stock could deliver improving performance. While Yelp's stock is not cheap, it could become increasingly attractive as the business delivers on its efficiency program. Therefore, it appears to have long-term investment potential.
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