The foodies have spoken.
After waiting a long time for a table, Yelp (Nasdaq: YELP ) is a screaming success today. The fast-growing local reviews website priced its IPO at $15 last night. That was above its initial expected pricing range, but that still wasn't enough. Yelp opened at $22 this morning, and inched even higher shortly after that.
Now with roughly 60 million shares outstanding, Yelp opened as a $1.3 billion company.
Is Yelp worth more than that or less? You probably wouldn't freely order off a menu with no prices, so let's delve into what Yelp's $1.3 billion market cap shortly after today's opening bell actually means.
A killer recipe
You have to love a business model where your users create content for free.
Dating back to Tom Sawyer tricking his chums into whitewashing his fence, there's nothing like creating a thriving Web 2.0 website where the visitors slap on new layers of fresh content. Surely Yelp has to be growing quickly, generating some killer profits to boot.
Well, the revenue growth part is certainly true. Yelp's top line soared 74% last year to $83.3 million. Unfortunately, Yelp's deficits have actually been widening with every passing year. Today's debutante darling posted a net loss of $16.7 million last year.
Red ink isn't the end of the world. Rare steaks are acceptable if they're tasty. The problem for Yelp is that we still don't know what the plated entree will feel like on Mr. Market's taste buds when the company does finally achieve profitability.
They're not really good fits. Angie's List is a site that requires a paid membership to sift through -- and contribute -- to its vetted local service reviews. Yelp can never put up a pay wall. Foodies and wannabe foodies will just scurry off elsewhere.
Trip Advisor is a closer match, but its specialty is travel. Lucrative hotel and destination reviews find advertisers shelling out healthy sums of money for leads. Over on Yelp, hotel and travel service reviews account for just 2% of its reviews. Restaurants and to a lesser extent shopping account for 62% of the content posted on Yelp, and it's really what the website is best known for. Advertisers aren't going to pay a lot for that, explaining why a site with 66 million unique monthly visitors is generating less than $100 million in trailing annual revenue.
Disrupting the disruptor
There are 25 million active reviews on the site, and that's not something that a potential rival can amass overnight.
However, what about places like Facebook and Foursquare where folks are already checking in to local establishments in greater numbers? Can't they take on Yelp if they tweak their models? Google (Nasdaq: GOOG ) clearly wants in. The world's leading search engine was reportedly in negotiations to acquire Yelp a couple of years ago. When that failed, Google settled for Zagat.
If any of those companies were interested in this space before, they're going to be even more ravenous now that Yelp is a $1.3 billion company.
It's true that we can't boil this down simply to the sheer volume of reviews. Yelp is a great brand. It also has a meaty Rolodex. There are 606,000 claimed businesses on Yelp, and 24,000 of those are attached to owners paying Yelp for premium marketing exposure.
The Yelp model is also about more than just ad revenue and privileged merchant services. Yelp was smart enough to partner with online dining reservations specialist OpenTable (Nasdaq: OPEN ) to let foodies make dining reservations without having to leave the Yelp site.
Then again, OpenTable as a partner brings us another opportunity to peg Yelp's valuation against another company.
OpenTable has a heartier moat than Yelp, since it has tens of thousands of restaurants that have installed and incorporated OpenTable's electronic reservation book into their operations. It's not just a growing source of cost-effective reservation leads; OpenTable's part of the restaurant industry's infrastructure.
OpenTable is very profitable, and it also generated 67% more revenue than Yelp did last year. Sure, Yelp is growing twice as quickly as OpenTable, but would you really take Yelp to be the more valuable company of the two?
Last night, OpenTable commanded the larger market cap. This morning, Yelp has turned the table on that comparison.
Yelp is an intriguing investment, but only at the right price. Today's frenetic buying, given the intentionally limited float, does not make the price all that appetizing.
If you want to follow the ever-changing menu of online dining stocks, track the latest news by adding OpenTable to My Watchlist until Yelp goes public.