Yelp Me, Please

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.

When it comes to publicly traded companies that rely primarily on user reviews, it's easy to try to compare Yelp to Angie's List (Nasdaq: ANGI  ) and Trip Advisor (Nasdaq: TRIP  ) .

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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Google, TripAdvisor, and OpenTable. Motley Fool newsletter services have recommended buying shares of OpenTable and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On March 02, 2012, at 11:51 AM, nickolassc wrote:

    At 1.3 billion market cap, that puts P/S at over 15. It's too expensive, no way a semi-mature company such as yelp will ever grow enough for that P/S ratio, frankly, I have no idea what the P/E, P/B ratios are currently, but that's not as important right now obviously.

    I think it's irresponsible pumping yelp's ipo right now, particullarly without mentioning the risks section listed on the s-1 filing:

    Risks Associated with Our Business

    Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

    Ÿ

    we have a short operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful;

    Ÿ

    we have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to achieve or maintain profitability. Our recent growth rate will likely not be sustainable, and a failure to maintain an adequate growth rate will adversely affect our results of operations and business;

    Ÿ

    we rely on traffic to our website from search engines like Google, Yahoo! and Bing. If our website fails to rank prominently in unpaid search results, traffic to our website could decline and our business would be adversely affected;

    Ÿ

    if users do not value the quality and reliability of the reviews, photos and other content that we display on our platform, they may stop or reduce the use of our products, which could adversely impact the growth of our business;

  • Report this Comment On March 02, 2012, at 2:09 PM, Futuroyolo wrote:

    Angies List(ANGI) the IPO price was $13 and it rose to over $18 on the first day of trading. LinkedIn(LNKD), social networking company went public on May 19th at $45 a share. On the first day, the stock rose to almost $110. Zillow(Z) was listed on July 20th and was priced at $20 and went as high as $44. ANGI is trading at $15.70, LNKD is trading at $87.21 and Z is trading at $30.98. These were three IPO's of last year and saw similiar up trend in their first days of trading. Companies wait for bull markets to debut their IPO and with so much media attention on IPO's these days they get over bought and at extreme price levels. LNKD is curently trading today at a P/E of 790; which tells me the when the markets starts to become bearish these companies stock prices will dump. Yelp is no exception if you were the first to buy the stock, then yes you will see short term gains, but get out quick because these stocks are speculative by definition and not investments.

  • Report this Comment On March 02, 2012, at 2:42 PM, CrowdKnowsBest wrote:

    Yelp! powered by OpenTable not the other way around even though it could seem that way. Overvalued. nickolassc made a great point the valuations don't justify this semi-mature company's expected growth.

  • Report this Comment On March 02, 2012, at 6:46 PM, DocMonsta wrote:

    As a consumer, Yelp is indispensible, but certainly not irreplaceable. As a business owner, I despise Yelp. They will never get money from me as they allow predatory reviews. Why would I pay Yelp money to allow the public to flog me? Not to mention their advertising rates make the old days of the Yellow Pages seem cheap. Most small businesses cannot afford to pay for advertising on Yelp. Unless they start charging the Yelpers themselves, I don't see them being able to make money.

  • Report this Comment On March 03, 2012, at 1:35 PM, gris48 wrote:

    Just after the first of the year my boss, a small business owner, was perusing some reviews of her business on Yelp. When she came across one that had some info in it that would only be known by someone that worked there, she determined that it was posted by a former disgruntled employee. She called Yelp to see what could be done about the review, but was given no real credible answer. A short while later in the day Yelp's advertising department called to see if she was interested in taking out an add on Yelp and she declined. Thinking something was up, my boss went online to check the reviews again and found that all good reviews had been removed, leaving only the bad ones. I think Google reneged on Yelp's acquisition due to these practices.

  • Report this Comment On March 03, 2012, at 3:12 PM, cmrk3 wrote:

    Was it possible for individual investors to get YELP at the $15 price? Can you do it through any brokerage by buying it at market the day before the IPO?

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