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# YELP: Grand Tales of ROI

Takeaway: YELP threw out a +500% ROI figure on its CPC ads. Before drinking the Kool Aid, let's take a look at its fuzzy math, and prior ROI claims.

#### KEY POINTS

1. YELP'S FUZZY MATH: YELP provides a dashboard to businesses that attempts to quantify revenues generated off of its platform.  There are two inherent flaws in its calculations: business revenues are calculated primarily off leads (not transactions), and those leads are not mutually exclusive events.  It's likely that YELP's stated CPC ROI figure is generated using the same kind of fuzzy math, especially since...
2. PRIOR ROI CLAIMS GROSSLY EXAGGERATED There is a reason why YELP isn't publishing any supporting data behind its +500% CPC ROI figure.  It made that mistake with its BCG study, which we tore apart last year, and found that its core CPM ad product produces a negative to limited ROI at best across most business categories.

#### YELP'S FUZZY MATH

Yelp provides a dashboard for "Businesses to Measure Success".  Note that red boxes in YELP's graphic below: the top box is the sum of all the customer leads from the bigger box below.  Revenues are calculated by applying an ASP to each of those leads.

There are two major flaws in its calculations that grossly exaggerate revenues

1. Revenues are calculated primarily off leads (not transactions).
2. Those leads are not mutually exclusive events.

For example, a website click doesn't guarantee a transaction, and is counted as such.  Further, each one of those "leads" is assumed to be a unique user, but that's not always the case.  For example, one person could click the website, make an online reservation, and pull up directions/map all for one transaction, but Yelp is counting each event individually as 3 distinct transactions.

This type of fuzzy math is likely the basis for its +500% CPC claim (e.g. assuming every click results in a transaction).

#### prior roi claims grossly exaggerated

BCG conducted a survey on YELP's behalf to illustrate the revenue benefit of Yelp to small businesses in the US (link).  However, BCG's calculation of "Incremental Revenue" is inherently flawed to the point where one could consider it intentionally misleading (same could be said for the above-mentioned Dashboard).

The metrics in the chart above compare incremental revenues for businesses that either advertise (green bars) or have claimed pages (blue bars) vs. businesses without a Yelp presence at all.  Naturally, incremental revenue in this case should be based on what an advertising business generates over a non-advertising business on the platform (essentially the difference between the green and blue bars), which is what we did in the table below.

We aggregated BCG's figures from the reported figures and chart data.  We then netted out YELP's stated average ad revenue from that study to arrive at net revenue.  We also layered in a gross margin scenario analysis to determine the actual return these businesses are generating from YELP advertising.

In summary, BCG's study (which YELP helped finance) suggests that for certain categories, if there is any cost associated with the transaction, advertising with YELP will produce a negative ROI.  In aggregate, the ROI will be highly dependent on that business's gross margin.  Remember YELP's core market is local businesses; many lack economies of scale and inherently have lower profit margins.  For context, many of the largest public retail companies struggle to generate north of 40%.

Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA

@HedgeyeInternet

# The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible

What’s the biggest risk to the market right now?

Most people would probably answer this question with one of the following: Oil, China, Russia/Ukraine, Terror/Middle East. To be sure, these are all big risks. The biggest risk I see, however, is valuation and that’s not a very Hedgeye thing to say.

One of the more interesting weather vanes for valuation is the Shiller PE, also known as the CAPE ratio. It looks at the market’s price relative to the trailing 10 years of earnings to smooth out the normal cyclical variability of corporate earnings. Hedge Fund billionaire Cliff Asness, co-founder of AQR, and frequent author (https://www.aqr.com/cliffs-perspective) published a terrific analysis of the Shiller PE several years ago.

To summarize, he looked at the monthly Shiller PE multiple from 1926-2012 (n=1,032) and then looked at the subsequent market returns over the following decade. What he found was really interesting. He took all those observations (each monthly value over 86 years) and broke them into deciles and then looked at the subsequent 10-year return by decile of starting Shiller PE. He found that S&P 500 returns matched perfectly against those starting Shiller PE multiples.

In statistical speak, the returns are monotonic to the starting multiple’s decile. In other words, you make the most money buying the market when the Shiller PE multiple is in the bottom decile (i.e. the market is the cheapest) and vice versa. The highest valuation decile begins at a multiple of 25.1x and goes up to the highest multiple ever observed, 46.1x. Following that period, the real return for equities in the ensuing decade was just 0.5%/year. The current Shiller PE is 27.3x. The table below shows these returns by decile, while the chart below that shows the current (and historical) Shiller PE.

While 10 years is a long time, and the markets could always rally higher in the short term, the reality is that unless almost a century’s worth of market history is suddenly irrelevant (the mother of all “It’s Different This Time” arguments), the outlook for buy-and-hold returns over the next decade is terrible, which is why we at Hedgeye constantly emphasize the need to be keep moving out there.

# Guest Speaker Call: OUTLOOK FOR NATURAL GAS PRICES AND BASIS

On Wednesday, February 18th at 11:00 a.m. EST Hedgeye’s Macro and Energy teams will host a guest speaker call on US natural gas fundamentals with Keith Barnett, Head of Fundamental Analysis at Asset Risk Management (ARM), which is an independent producer services company that provides solutions for more than ninety clients through financial hedging advisory, physical marketing, and midstream solutions.

Topics for Discussion

• Rapid growth in US production driven primarily by emergence of Marcellus / Utica shale play has created basis price dislocations as infrastructure and demand re-calibrate to new supply / demand regional balances…
• Demand growth along the US Gulf Coast [industrial, LNG exports, and pipe exports to Mexico] create a “battle zone” for basis differentials to re-balance in 2016-2020, with the Haynesville waiting in the wings…
• British Columbia / Northern Alberta shale plays will look for a home, especially if BC LNG exports continue to be delayed and lower crude prices dampen oil sands (gas demand) development…
• Lower crude prices will affect the supply side through reduced liquid-oriented gas, and the demand side by impacting petchem plant development, global LNG price arb, and Mexico project development…
• And more…

A visual presentation will be included and circulated along with dial-in information prior to the call.

About Keith Barnett……Keith Barnett is Senior Vice President and Head of Fundamental Analysis at Asset Risk Management.  He has over 30 years of experience in the energy industry with leading companies like Chevron, Columbia Gas Transmission, American Electric Power, and Merrill Lynch Commodities. Keith held engineering, managerial and executive positions with those companies in the areas of production, drilling, offshore platform design, natural gas marketing, fuel procurement, trading and structuring analytics, corporate strategy and fundamental analysis of energy markets. He had significant participation in two National Petroleum Council studies; including leading the power demand team in the 2003 natural gas study and serving on the steering and report-writing committees. Keith was also the Natural Gas Task Force lead for the Edison Electric Institute for several years. He has testified before the Federal Energy Regulatory Commission and the Senate Sub-committee on Energy on natural gas and power matters. He is a frequent speaker on natural gas, power, and global energy markets.

Prior to joining Asset Risk Management, Keith served as Director of Strategic Analysis for Merrill Lynch Commodities where he led the effort to create an integrated global point of view for energy commodities that could serve short term trading and longer-term investment horizons. He also worked most recently with Spring Rock Production, which is producing a state of the art natural gas and oil production forecast for the USA and Canada.  Keith has an engineering degree from Texas A&M University.

About Asset Risk Management……Headquartered in Houston (with offices in Chicago, Denver and Pittsburgh), Asset Risk Management (ARM) has been helping oil and gas producers make better hedging decisions since 2004. ARM represents more than 85 public and private companies and interacts with all major energy commodity counterparties. ARM’s value is realized not only in the development and implementation of dynamic strategies, but in the ongoing optimization of those strategies as warranted by market volatility, execution efficiencies, reporting and continual monitoring of technical and fundamental factors in the market with the client's best interests and specific objectives in mind.  Learn more: http://asset-risk.com/.

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# GLD: Removing Gold from Investing Ideas

Takeaway: We are removing Gold from Investing Ideas.

We are removing Gold from Investing ideas in the aftermath of reported Q4 U.S. macro data and a Fed meeting which was largely uneventful. Remember, we like Gold (which is quoted in U.S. dollars) against a declining dollar and a compressing yield curve.

The truth is that the 10-year Treasury yield has ticked up to 2.0% from 1.65% at the end of January. The dollar is down 0.70%, but we believe the incremental FED reversion on an interest rate cut on the back of a Q4 GDP miss would have been more of a catalyst if this trade had legs.

Over the longer-term, we still think the dollar could strengthen against the Euro and Yen which would be bad for Gold by historical evidence.

# February 13, 2015

In today's edition of RTA Live, Hedgeye CEO Keith McCullough outlines the Reatl-Time Alerts positions as of 10:15AM, gives a crash course in volatility, and takes subscriber questions on the phone.

# Cartoon of the Day: Same Crap, Different Day

Greece remains an unmitigated hot mess.