Yelp expected to swing to profit in 2017

By Christine Huang

One month after opening the doors to Yeero Revolution, a trendy gyro joint in Evanston, co-owner John Nikolaou decided to advertise on Yelp, a popular online review platform.

The owner of the two-month-old restaurant says he’s already seeing benefits.

“Yelp definitely drives a lot of people,” Nikolaou said in an interview. “They’ll tell you, ‘We saw you on Yelp, the reviews were great, and here I am,’” he said.

Yeero Revolution
Yeero Revolution, a two-month-old-restaurant, has benefited from advertising on Yelp. (Christine Huang/MEDILL)

Based in San Francisco, Yelp allows consumers in over 30 countries to rate and review their experiences with local businesses. As of Sept. 30, Yelp had 135,000 advertisers and 174.1 million monthly unique visitors across its web, mobile and app platforms.

The company has even become a fixture in popular culture, appearing everywhere from South Park’s “You’re not Yelping” episode last year to The Tonight Show Starring Jimmy Fallon in which the host and guests read “Dramatic Yelp Reviews.”

Yet the company, which went public in 2012, has struggled to turn a profit. Yelp lost $32.9 million in 2015, and analysts surveyed by Bloomberg expect its losses to narrow to $10.3 million in 2016.

This year could be a turning point, though, thanks to changes in the company’s strategy, analysts say. In November, Yelp announced its plan to wind down international business operations, laying off 4 percent of its work force in the process, and focus on domestic markets instead.

The company also launched a series of new transaction-oriented features, including an online reservation system, a food delivery platform and “request-a-quote,” which allows Yelp users to request price quotes on services like plumbing and cleaning. Another new feature, “call to action,” lets business owners offer incentives to customers.

Local advertising accounts for the majority of Yelp’s revenue. Advertisers pay between $200 and $2,000 for sponsored listings, enhanced pages, transactional features, and other capabilities.

Yelp is expected to earn $12.3 million in 2017. The company’s estimated revenue for this year is $894.8 million, up 26 percent from the estimated revenue of $712.9 million for 2016.

Yelp Earnings
Yelp is expected to swing from a loss to a profit in 2017. (Christine Huang/MEDILL)

Yelp’s stock price has been on the rise. When markets closed Tuesday, shares were $42.41, up 96 percent from a year ago. But stock prices are still below the company’s peak price of $97.25, set in March 2014.

Analysts are optimistic about Yelp’s performance this year. Of the 36 analysts surveyed by Bloomberg, 17 give Yelp a “hold” rating and 16 give it a “buy” rating. The 12-month consensus target stock price is $41.89.

Yelp is expected to maintain its position as one of the key players in the market, said Aaron Turner, equity research analyst at Wedbush Securities, in an interview.

“They are the leader for local search and discovery,” Turner said. “When users want to discover a new restaurant or a new business in their neighborhood, they go to Yelp above all other options.”

Yelp’s improved employee retention rate will also play a role in its success this year, Turner added. In the past, Yelp suffered from high turnover rates because its employees, most of whom were recent college graduates, were frequently hired away by other companies.

“As they progressed through this year…they were able to keep their salespeople employed, they didn’t lose them to competitors, [and] those salespeople ramped in their efficiency, so Yelp was able to reach some profitability improvements,” Turner explained.

Yelp Employees
The majority of Yelp’s sales force is composed of recent college graduates. (Christine Huang/MEDILL)

Analysts also point to Yelp’s transaction-oriented features as drivers of success in 2017.

“We still see in Yelp a strong and improving local solution, one that is morphing from a local marketing platform to a local marketing and transactions platform, which means that the strategic value of Yelp is rising,” said Mark Mahaney, analyst at RBC Capital Markets, in a report.

An RBC investigation of “request-a-quote” showed that 46 percent of users hired contractors they contacted through that feature, indicating a high return on investment for businesses, Mahaney said in the report.

Mahaney has an “outperform” rating on Yelp and a target price of $55.

Yelp’s ability to scale its business, reduce international expansion and forego traditional “spray and pray” branded advertising in favor of more targeted ad formats will help drive profitability, said Brian Fitzgerald, equity analyst at Jefferies Group LLC.

With its new functions, Yelp allows users to seamlessly transition from reading reviews to booking appointments, ordering food or requesting a price quote, he added. Fitzgerald has a “buy” rating on Yelp and a $45 target price.

Despite its popularity, Yelp still faces some challenges.

“Google has always been a key threat. They’re the number one mobile operating system,” said Brian Fitzgerald, equity analyst at Jefferies LLC.

What’s more, not all of Yelp’s clients are seeing significant results from advertising on the site.

Donna Lee, founding partner at Brown Bag Seafood Co., said in an interview that she has not noticed a “measurable difference” in traffic since she began advertising on Yelp a little over a year ago, but said she liked being able to respond to reviews and uploading her own photos of her business.

“All business owners one way or another feel a little bit captive by Yelp cause you do have reviewers who will sometimes say really nasty things just to get a free meal,” Lee said.

For businesses like Yeero Revolution, however, Yelp is essential, said Nikolaou.

“Yelp is one of the biggest ways in Chicago to get exposed, to let people know, ‘Hey, I’m here. Come give me a shot.’” he said. “So far it’s been working really well.”

Photo at top: Employees work in Yelp’s Chicago office. (Christine Huang/MEDILL)