Yelp Inc (YELP): Creating Value

However, Yelp still gets a more than 50% of online traffic from search engines on desktop and also on the mobile site, with the lion’s share coming in from Google Inc (NASDAQ:GOOG). This hasn’t impacted the company, but might pose a stronger threat down the road. As Google has started showing reviews, photos, ratings of local businesses using Google Inc (NASDAQ:GOOG) Maps and Zagat on the right hand side when a user searches for the name of a business. Google is motivated to carve-out a stronger footing in local businesses because it can earn a lot more revenue from search advertising by placing more information directly from its search engine, instead of allowing those eye-balls to go to competing platforms like Yelp, TripAdvisor etc.

Creating Value

Consumers are increasingly using the company’s platform for reaching to businesses through phone-calls and directions, which are relatively stronger leads just like the ones OpenTable Inc (NASDAQ:OPEN) provides with its reservation services. Yelp has started selling ads in European markets, with some countries gaining strong users traffic. Yelp Inc (NYSE:YELP)’s operations have now expanded in 21 countries. And the company’s integrations with Qype will give the company more scale and incremental monetization opportunities. Yelp generated only 6% of its revenues from International markets, and going forward, this segment can expected to make much more.

Small businesses claiming their business account saw an annual revenue lift of $8,000, whereas businesses that advertise on Yelp saw a revenue lift of $23,000, according to a study by BCG. Typical businesses spend ~$4,000 a year to advertise on Yelp, which represents a solid ROI for the local advertisers, according to BCG. In addition, Yelp is also increasing its measurement techniques to help small and local businesses to understand the value of advertising on Yelp.

Positive territory

Yelp’s business model of crowd sourced reviews enables the company to earn gross margins of 93%, but as the company is investing in the build-out of its operations in domestic and international expenses, the company’s bottom-line numbers are in the red. However, once the business is more established and its sales and marketing expenses trickle down substantially, the company’s operating margins should expand dramatically.

The article Can Yelp’s Growth Story Continue? originally appeared on Fool.com and is written by Ishfaque Faruk.

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