Founded nearly 20 years ago, Yelp (YELP, Financial) is now the most widely used business directory with over 150 million visitors a month its website (30%) and mobile app (70%) to find, rate and review restaurants, bars and other local businesses. It is ranked 62nd on the list of the most visited website in the United States. However, looking deeper at the company’s numbers, something doesn’t add up, and there's a lot of room for improvement.
In the last 12 months, Yelp generated over $1.1 billion in sales with an impressive 91% gross margin; however, the company only sends 3.4% to its bottom line with major non-essential expenses eating up most of it. Just what is wrong with Yelp? There are two key performance indicators (KPI) critical to analyzing internet based companies like Yelp - revenue per active users and revenue per employee - so let's take a look.
Revenue per active users
Yelp produces revenue via advertising. It has 54 million active users. That means the company generates $20 per active user per year on the top line. While the directory is filled with mostly small businesses, many of which didn’t survive the pandemic, this number still seems super low. Meta's (META, Financial) Facebook generates about $41 per year per monthly active user. Yelp has to find a better way to capture more ad spend from its active users and visitors, especially since 90% of Yelp’s traffic comes from the United States.
Yelp users stay around 3 minutes on the site with a 50% bounce rate. Facebook and Twitter users stay 9 minutes and 10 minutes on average with a 32% bounce rate. Granted, the social media networks are also the most visited sites in the world. Yelp gets nearly 180 million visits per month, generally in short bursts because they’re really good at getting people the right content as fast as possible. There is a community that helps leave reviews and posts photos, of which the company is not capturing any real value from. While a Yelp review isn’t like a Michelin Star, many small businesses rely on it to build trust and confidence within their local markets. That’s not likely to change.
Revenue per employee
One metric that is easily improved is revenue per employee. Currently, Yelp generates $262,950 per employee, which for a technology company is absurd(ly low). Facebook gets about $1.3 million per employee on the top line, and most of that comes from advertising like Yelp’s network. Twitter, before Elon Musk sent 60% of its employees packing, was generating $667,000 per employee. Even Angi Inc. (ANGI, Financial), which is not in the top 1,000 websites in the United States, generates $100,000 more per employee compared to Yelp.
If Yelp cut its employee base by a similar margin to Twitter, the revenue per employee would jump to around $650,000, which is still lower than most in this space. This makes more sense rather than increase ad rates since its engagement isn’t high enough to justify higher rates. Personally, I believe there are too many people employed by Yelp, though I'll admit I don't really know enough about the operations of the business to be able to estimate whether or not it needs so many employees, or whether the website would run as well without them. The lower revenue per employee could just be due to lower engagement.
Research and development expenses
I think that research and development is a catch all term for waste at most of these technology firms. At least in Meta or Alphabet (GOOG, Financial)(GOOGL, Financial), investors reasonably know R&D is being done because the companies make a point of bragging about it; however, what does Yelp spend its R&D budget on? Direct competitor Angi Inc. (ANGI, Financial) spends 3.8% of its revenue or $71 million on R&D while Yelp spent 26.2% of its revenue or $303 million on R&D. This seems unjustifiable to me.
If all Yelp did was cut its R&D budget down to 4%, it would immediately boost operating income by $250 million. If it reduced employee head count, say by 50%, it could add another $200 million to pre-tax earnings. These are all hypotheticals, but based on a price multiple between 10 to 20 times earnings on roughly $400 million net, that could make Yelp a $4 to $8 billion company, if it manages to pull off such changes without reducing any of its sources of income.
Yelp is an acquisition target
With an enterprise value around $1.7 billion, plenty of cash and very little debt, I believe a number of technology firms out there could buy it and build it into something more profitable. There’s a massive opportunity here to extract more revenue at better net profit margins than we’re seeing right now.
With that in mind, Yelp could still boost advertising revenue without laying off employees or decreasing its non-essential expenses. I doubt that will be the case, but looking around at other companies in the space, I believe Yelp’s stock is still attractive and worth taking the chance management will either start focusing on profits or some other buyer will come in and make the necessary changes.
