Rapidly growing consumer review platform Yelp Inc (NYSE:YELP) has taken a few key steps that might turn around its fortunes in the near-to-medium term. Its platform has seen large increases in user traffic lately, and got a big face-lift as well. A growing number of users will help Yelp stand out even more in the highly fragmented consumer reviews segment. A few catalysts will drive the company’s earnings to positive territory in the future.
1. Review Provider Turned Social Media Site
Just like many other investors and analysts, I too wasn’t convinced of Yelp’s business model, but my skepticism has diminished. Yelp has rapidly evolved from a standalone review provider to a growing social media platform. In addition, the site is increasingly getting users to engage with each other and contribute more to the site in the form of incremental reviews, photos, etc., which in turn drives more user traffic to the platform.
Yelp’s platform got more than 100 million visitors in January 2013, and these users are not only just reading these reviews, but also contributing heavily by adding reviews. The number of reviews on Yelp now stands at 36 million, excluding the content and traffic from Qype. One of Yelp’s bigger competitors for consumer reviews, Tripadvisor Inc (NASDAQ:TRIP), also has a huge content base of more than 100 million customer reviews.
However, TripAdvisor gets a large portion of its 50 million monthly visitors from Facebook Inc (NASDAQ:FB), which is not the case for Yelp. Yelp’s traffic is a lot more organic, primarily driven by its robust social network and the deep integration with Apple Inc. (NASDAQ:AAPL)‘s iOS 6.
TripAdvisor and Yelp are competing with each other for mostly restaurant and hotel reviews. Tripadvisor Inc (NASDAQ:TRIP) gets more than half of its traffic to its platform for hotel reviews, as it was previously a business division of Expedia Inc (NASDAQ:EXPE). However, Yelp’s user engagement in especially strong in the restaurant category, and the number of reviews are rapidly growing due to the transformation into a social media platform. The rapid transformation towards social networking also reduces competition from search giant Google Inc (NASDAQ:GOOG).
2. Key Platform Improvements
The life-blood of social media networks is the amount of user traffic that they can generate, and how engaged those users are. Yelp has made big overhauls to its platform, which made users a lot more engaged. It followed the path of bigger rivals Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD) in implementing a home page, which is just like the News Feed feature, which shows the activities, comments, reviews, photos, etc., of a user’s friends.
This heightened user engagement, while in its early stages, will surely gain momentum and create some big network effects. It will lead to users frequenting the site a lot more, and appeal to their network of friends. That being said, Facebook has built a huge moat around its business due to its unparalleled network effects.
3. Mobile Monetization
Yelp gets roughly 46% of total searches from mobile devices alone, from more than 9.4 million unique users. And just recently Yelp started monetizing its mobile user traffic by using mobile ads for local businesses. In fact, almost 25% of Yelp’s local ads are being placed on its mobile platform, as mobile users are a lot more engaged and are more likely to click on ads.
The company’s management expects that in the future a large number of searches will be conducted on mobile devices. Increased engagement by users will also lead to more location-based ads, as the location of the user can be used to show ads of businesses nearby. The leading social media platform, Facebook Inc (NASDAQ:FB), generated 11% of its total ad revenue on mobile, and also expects mobile to grow at a much faster pace than on desktops as well.
4. Brand Advertising Dollars
Yelp’s revenues are heavily reliant upon the advertising dollars it receives from local businesses. Revenues from local business made up roughly 80% of its total revenues in 2012, while revenues from brand advertising represented only 15%.
Brand advertising prompts big companies to spend a lot of dollars just to keep their consumers aware of their brands and to remind the consumers of their existence. For a vertical search company like Yelp, this represents a big revenue generation potential, as the primary intent of the advertiser is not to make an immediate sale but to stick with the consumer.
And the increased amounts of user traffic will ensure that brand advertisers with big budgets will start using Yelp as a medium, and also existing ones will allot more of their budgets to the company. This holds true for most web 2.0 companies–Facebook Inc (NASDAQ:FB)s display advertising revenues are increasing and will keep on rising mainly due to the large number of user traffic it receives every month.
The Takeaway
Yelp’s business of capturing word-of-mouth reviews from the masses for its business listings is getting a lot of user traffic. The platform’s ability to stimulate and engage users in a social media setting will make sure that users frequent the site and spend more time on the site. As users spend more time and contribute more reviews on Yelp, not only will it be able to earn more revenues from small businesses, but also from big brands.
The article Yelp’s Fortunes Will Turn Around originally appeared on Fool.com and is written by Ishfaque Faruk.
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