Yelp’s top-line growth story
Sanderson argues that Yelp Inc (NYSE:YELP) should be analyzed as a top line growth story that is largely about revenue growth at this stage. He points out that Yelp’s 2005-06 cohort of markets (Cohort 1) has “re-accelerated revenue growth” during the last nine months. First quarter 2014 growth of 61% was 1,100 bps faster than 1Q ’13.
Sanderson summarizes his view of the current Yelp growth story. “We expect another transition quarter from int’l following the shuttering of Qype products and exiting certain verticals at end-2013. We expect growth acceleration overseas beginning in 2H. This will be important to sentiment through the year, but not likely a factor before 3Q.”
Churn controversy
There has been a controversy surrounding customer attrition rates and the total addressable market for YELP for some time. One research boutique went so far as to claim that YELP has an “absurdly” high churn, losing around 90% of its customers annually, and that the total addressable opportunity of potential customers is not in the millions, but only 170,000.
Sanderson says he does believe that attrition for this business is high as it is “naturally be tied to the rate SMB failure”, but he also says basic math says attrition rate cant be extremely high given the high growth rate in Cohort 1.
The report also highlights that new local business accounts will likely be more of a focus than usual because of churn controversy. Sanderson says to anticipate 10.5k to 11k net new local business accounts this quarter.
Summary of bullish view
Sanderson summarizes his bullish perspective on Yelp Inc (NYSE:YELP) below. “We remain positive on YELP for its growth trajectory, competitive position, large addressable market and earnings power as the business scales. We are encouraged by acceleration in YELP’s oldest markets and, as newer markets are on a steeper monetization curve, that continues to widen (see diagram pg.3). We believe this sets up years of high revenue growth so long as these relationships hold.”
