Good reviews for Yelp's IPO

The business-review site faces serious headwinds, but its growth is something to behold.

By Minyanville Mar 2, 2012 1:53PM
Image: Man with laptop (© Ken Seet/SuperStock)The business-review site Yelp (YELP) debuted on the markets Friday, a day after pricing its shares a bit higher than expected at $15. But investors clearly thought the stock was worth more. In the first minutes of trading, shares soared 65% to $24.77.

By midday, shares had pulled back slightly to about $24.28.

The IPO price placed Yelp's value at about $900 million, but Friday's stock rise sent the valuation closer to $1.5 billion. Yelp looks pretty smart now for spurning Google's (GOOG) $500 million offer in 2009.

Is this a legitimate value for Yelp, or are we seeing a throwback to the irrationally high valuations of late '90s tech companies?

Yelp has a lot going for it. The product itself is very well-liked, and it's biggest strength is its dedicated and engaged users. In today’s world, the opinion of the crowd is trusted over that of a pretentious newspaper restaurant reviewers and Michelin stars.

The user base is growing fast, and so is revenue. In 2011, revenue jumped by 74% to $83.3 million. Most of the revenue comes from local businesses advertising on the site. A disproportionate share of ad revenue comes from markets where Yelp is most established, like San Francisco and New York. The site brings in 66 million visits a month, and users have posted 25 million reviews so far. With momentum like this, it isn't too generous to foresee Yelp dominating online word of mouth in the coming years.

A closer look at the company's financials should give investors pause, however, especially the fact is that Yelp hasn’t made a profit since it went live in 2004. Last year, the company lost $16.7 million. This isn't usual for a young company that needs to expand market share and grow revenue. Yelp's operating costs are high and rising. In one quarter, operating costs were as much as 67% of revenue.

Another concern is that Yelp's business has hardly any barriers to entry. Just about anyone can start a similar site -- and bigger sharks are circling. One company that Yelp made completely irrelevant was Zagat, which was recently purchased by Google.

Google could easily push harder into the local ad and restaurant-review business. That will create some problems for Yelp, which looks to Google as a key source of traffic. When Google prioritized search results from its own social network, Google+, over Twitter results, it proved that it isn't above using its search might to push rivals down. This could jeopardize Yelp’s growth. Other companies like Facebook and nearly identical competitor Angie's List (ANGI) will also be competing for local ad dollars.

In the first few hours of trading, Yelp already popped up by over 66%.  Whether Yelp's stock will hold onto its five stars, only time will tell.

More from Minyanville:
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Random Thoughts: Is Gold Giving Stocks a Warning
Bad Business: 10 Outrageous Company Image Busters



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