Why you should stay away from Yelp

A cloud hangs over this much-hyped IPO -- and it has everything to do with a lack of profit.

By Jonathan Berr Feb 27, 2012 4:53PM

Image: Man with laptop (© Ken Seet/SuperStock)Yelp, which is going public this week, won't be profitable for quite a while -- if ever.

The reviews site is lucky to not be in a deeper financial hole than its $41.2 million deficit at the end of last year. Total expenses soared to $99.5 million from $7.67 million in 2007, a gain of nearly 1,200%, while revenue rose more than 2,100% to $83.3 million from $3.74 million.  

Its not a question of if Yelp's costs will grow at a faster rate than revenue -- but when. This is all spelled out in Yelp's S-1.

In its filing, the San Francisco company said it expects its revenue growth rate to decline in the future for a number of reasons. Those include a maturation of the business and fewer cities left to expand into. And costs will rise, the company said, particularly for sales and marketing, product development and technology infrastructure.

What did Yelp tell investors in its IPO road show? The following video has details.

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Yelp certainly is a great product, attracting 66 million monthly unique visitors who have posted 25 million business reviews. Its hold on its user base, though, is tenuous at best. Competitors range from Angie's List  (ANGI), whose shares are down more than 3% over the past year despite a much-hyped IPO, to Google (GOOG), which bought the popular Zagat site last year. 

Yelp's relationship with Google is especially problematic. CEO Jeremy Stoppelman sought help from the federal government last year, claiming the search engine giant stole its content after Yelp turned down a Google buyout offer. Google has denied wrongdoing.

Google was responsible for more than half of Yelp's traffic in 2011, The Wall Street Journal reported. But Google removed some of its links to Yelp and promoted its own competing products in search results, the newspaper added.

There isn't just one red flag that should concern investors. There is an entire color guard of things that can and probably will go wrong for the money-losing company. Profitability, if it ever comes, is years away.

To be sure, Yelp is fun to use. Rating sites, though, are a dime a dozen. One day, maybe soon, the next Yelp will emerge that will be even cooler than the original. Yelp will be cast aside quicker than you can say MySpace.

You can bet that Yelp's shares will skyrocket after its IPO, only to come crashing down to earth in the coming weeks. Its price will stay low until Yelp figures out how to make money.

--Jonathan Berr enjoys trashing pretentious restaurants on Yelp.  He won't be buying the stock.





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