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Kerrisdale Capital 1Q17 Letter – Yelp Investment Thesis

Kerrisdale Capital 1Q17 Letter

Performance/Review:

  • Up 4.3% for the quarter vs. 6.1% for S&P 500 and 3.0% for Barclay Hedge Fund Index
  • Since inception, Kerrisdale is up 1,357.3% vs 202.5% for S&P 500 and 58.5% for Barclay Hedge Fund Index

Yelp

  • Recently retained a long position in Yelp
  • With over 127 million reviews and nearly 200 million unique monthly visitors, Yelp is a leading and unique local search and review site
  • Due to higher than expected customer churn, management reset expectations for 2017 on its latest earnings call – sent shares down 28% after-hours to below $25/share (34% decline in enterprise value)
  • Considered the price action a gross overreaction to the lowered guidance
  • Revised forecast gave us the opportunity to buy shares at 2x LTM revenue, 13x LTM EBITDA and 16x LTM FCF
  • Very unique asset and believe its brand, breadth of content and popularity would be extremely difficult to replicate
  • While there’s a perception of Yelp as being a restaurant/bars only review site, that category represents only 18% of reviews and even less so in terms of revenue

Yelp Revenue Breakdown:
yelp revenue breakdown

  • For other businesses, such as a local dental office or a fitness center, understanding the value proposition of advertising on Yelp is easier for a variety of reasons
    • Nearby competitors are fewer, each customer review is more valuable for the client since less reviews are provided for non-restaurant businesses, etc
    • Being at the top of Yelp searches is similar to the need to be on the first page of Google results
  • In recent years, Yelp has introduced other features on the site such as Eat24 (competes with Grubhub) and Yelp Reservations, an alternative to OpenTable that allows customers to make reservations directly on the Yelp site and app
    • Popularity is undoubtedly growing as transaction related revenues grew 28% in the last 12 months
    • Further engaging user base, increasing the value of the platform to both the local businesses and users
  • Has the potential to grow well beyond its current base of 143,000 customers
    • Will grow top-line by 20% in 2017 and sell-side calls for ~$1.2B of revenue by 2019, representing a CAGR of 18%
  • Applying a 3x revenue or 20x FCF multiple on 2019 revenue/FCF yields nearly $45/share, implying more than 60% upside
    • Also believe that Yelp has significant strategic value and in that scenario, shares would be worth meaningfully more
Image Source: Linkedin (Ecesu Bayir)
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