Investors waiting to feast on Facebook's IPO as a main course may find themselves warming up to Yelp as an appetizer.
The fast-growing local reviews website is getting closer to going public, filing an amended S-1 that now covers all of last year's financials.
This may not seem like a banner time for a website fueled by user reviews to hit the market. Angie's List
Yelp also has its shortcomings. It's still not profitable. Yelp's deficits have actually widened every year in its five-year history outside of 2009. If it's able to pull off its IPO at the high end of its initial rage, the stock would be valued at a rich 10 times trailing revenue.
However, there are also plenty of other flavorful things working in Yelp's favor.
The magnetic appeal of the community-driven site is undeniable. When someone suggests a new place to eat, don't you automatically find yourself gravitating toward Yelp?
There are now 66 million unique monthly visitors hitting Yelp's website, and nearly 6 million users of Yelp's mobile app. There are 25 million reviews populating the website, and that doesn't include 5 million more reviews that Yelp has filtered out and another 1.8 million reviews that have been outright removed.
There are 606,000 claimed businesses on Yelp, and 24,000 of them are paying for premium marketing services.
This all adds up to a business where revenue soared 74% to $83.3 million. Unfortunately, Yelp posted a net loss of $16.7 million.
Assembling the ingredients
How much would you pay for this business?
There will be nearly 59.9 million shares outstanding after the offering, and underwriters are looking to price the debutante's shares between $12 and $14. At the high end, we're looking at a market cap of $838.6 million.
If this seems a bit heavy, you won't find a lot of elbow room among the cynics.
Yelp generates 62% of its reviews from restaurant and shopping businesses -- with most of that coming from eateries -- so let's bring up online dining reservations specialist OpenTable
OpenTable isn't growing as quickly as Yelp. Revenue climbed 41% last year. However, OpenTable has been profitable for ages. OpenTable is trading for less than nine times trailing revenue -- and even at that height there's no shortage of investors tagging the stock as overvalued.
Angie's List and TripAdvisor are logical peers. All three companies rely on engaged users creating the content to attract even more users.
Yelp's model isn't a perfect fit. Just 4% of Yelp's reviews are in the home and local services category where Angie's List thrives, and Angie's List's model revolves around premium subscribers that pay for access to vetted reviews.
TripAdvisor's hotbed of travel and hotel reviews account for just 4% of Yelp's reviews, and that's probably a pity for Yelp because there's serious money to be made in travel. TripAdvisor generated more revenue from click-based advertising in its latest quarter than all of the money that Yelp collected last year. A potential traveler on TripAdvisor figuring out where to stay in Charlotte is going to be more valuable to an advertiser than a local trying to choose between fish tacos and sushi in San Diego.
Expedia knew what it was doing when it released TripAdvisor as a stand-alone entity, giving investors a pure play on consumers when they're on the verge of making a big-ticket decision.
TripAdvisor's multiples are ultimately more in line with OpenTable. TripAdvisor and OpenTable trade at 18 and 24 times next year's projected profitability, respectively. OpenTable is growing faster, with an arguably superior moat.
Angie's List is the better match for Yelp, but seeing how Angie's List's IPO was priced at $13, opened at $18, and has meandered lower ever since won't be too encouraging for those weighing the purchase of Yelp.
Neither company is profitable. Both are growing quickly. However, Angie's List packs a slightly lower market cap, even though analysts see 2011 revenue of nearly $89 million when it reports next week.
The Yelp IPO will still be considered a success.
TechCrunch reported nearly three years ago that Google
Yelp mania will be curbed by the lofty valuation, lack of profitability, and the fear that Facebook or Google may turn its attention to disrupting Yelp's model.
Yelp is still a compelling company, but you won't want to overpay.
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.