As investors ponder if Yelp Inc (NYSE:YELP) is overvalued at $42, the big picture needs to be considered. The company has a market value of $2.7 billion and revenue that will only cross $200 million this year. While it might be difficult to envision it as worth $10 billion at this point, the company appears to have all the makings of a future that big.
The company is a leader in local reviews, with over 39 million reviews and 100 million monthly active users as of the end of March. It operates in over 20 countries, including most of the developed world such as the U.S., Canada, UK, Germany, and France.
The sector has precedence with Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD) currently at values in excess of $20 billion, and a fellow review site Tripadvisor Inc (NASDAQ:TRIP) approaching that valuation. In addition, several others, including Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA), reached that valuation before faltering. Heck, even private Twitter, Inc. is listed with a value of around $10 billion now. With local and mobile based advertising a valuable revenue source and Yelp Inc (NYSE:YELP) controlling the local review business, what will keep it from not only reaching but eventually surpassing $10 billion?
Growth prospects
Lots of people debate whether or not Yelp Inc (NYSE:YELP) provides a useful service that local business will really want to advertise on. The claim always goes that restaurants or bars won’t want to advertise on a platform with negative reviews.
So far the numbers don’t back up those claims. Analysts expect revenue to surge by 63% during Q2 2013 and for it to continue surging by at least 43% next year. Don’t be surprised to see that growth rate increase as the company continues to beat expectations.
More importantly, analysts finally expect Yelp Inc (NYSE:YELP) to be in the black next year. If that can occur on a revenue base of around $315 million, the profits should surge when revenue hits $1 billion in a few years.
The expectation that 2015 revenue will reach $500 million appears plausible. Assuming revenue continues creeping up to around $335 million for next year, Yelp Inc (NYSE:YELP) would only require 50% growth in 2015 to reach that milestone. A milestone that if reached could provide a $10 billion valuation, as the examples below suggest.
LinkedIn example
LinkedIn Corp (NYSE:LNKD) provides one of the better examples of where Yelp Inc (NYSE:YELP) could end up regarding valuation if it continues to be the local review destination. The online professional network firm reached just under $1 billion in revenue for 2012 and the stock has soared to be worth $22 billion.
Even at the much higher revenue base, the company is still growing 54% and trades at nearly 15 times current year revenue expectations. That actually places LinkedIn Corp (NYSE:LNKD) at a higher multiple than the much smaller Yelp.
This example also highlights how Yelp is likely to reach an inflection point to where revenue growth accelerates as more users jump on board and advertisers flock to the service
TripAdvisor example
While Tripadvisor Inc (NASDAQ:TRIP) hasn’t quite reached a $10 billion valuation, the travel review site is getting closer that milestone with no signs of slowing down. TripAdvisor is only skimming along with 22% revenue growth, yet it is able to maintain a 10 times current year revenue valuation. The company, though, is very profitable at nearly 30 times forward earnings expectations. Both valuation metrics appear lofty for 20% growth providing assurance that a fellow review site could maintain lofty multiples even as growth slows considerably from the current over 50% rate.
Bottom line
Anybody that has used the local reviews on Yelp to locate good restaurants realizes the power of the service. When comparing it to public examples such as LinkedIn or Tripadvisor Inc (NASDAQ:TRIP), one quickly sees that the $10 billion valuation is not only plausible, but the stock could reach that level quicker than most think. Even private examples such as Twitter back up these expectations. In accordance, Yelp shouldn’t be expected to pullback from the existing levels though investors might want to wait for one for a great entry point. Buying a stock that goes from $40 to $200 is awesome, but buying it for $30 is even better.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends LinkedIn and TripAdvisor. The Motley Fool owns shares of LinkedIn and TripAdvisor. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Will Yelp Become the Next $10 Billion Social Media Company? originally appeared on Fool.com is written by Mark Holder.
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