As it turns out, not really. Squeals of delight on the day of Yelp's IPO turned into whimpers of disappointment the very next trading day, as share prices plummeted 15%, to $21. Then, the comparisons began: LinkedIn, Pandora, Groupon. Had yet another Internet commodity driven off the IPO cliff?
It's a bit early to say, but those analogies bear fleshing out. LinkedIn
Valuation: A mysterious process
A big problem, it seems, has been the ability to value these Internet companies with any degree of certainty. This leads to all sorts of estimates, of which the highest usually becomes the price at the opening bell. Groupon's value ranged from $10 billion to $30 billion in the run-up to its IPO. Pandora, characterized by Mashable.com as having "never been in the black," seemed to base its opening price on the popularity of LinkedIn's IPO rather than its own profitability.
Which brings us to the question of Yelp's value. Taking a look at the numbers on WebProNews, it is obvious that Yelp is not making money. Last year, the company showed a net loss of $16.9 million, even though revenue was its highest ever, at $83.3 million. Like many websites, Yelp makes money selling advertising. Is there really that much advertising to go around? Perhaps.
So how did Yelp come up with its valuation? A clue may lie in a comment from the president of IPOdesktop.com, who predicted that there would be many people "who don't know valuation metrics" buying stock on opening day. It appears that many investors get caught up in the excitement, realizing a bit later that they probably paid too much for those shares, which later drop in value. Sounds like this happens a lot, doesn't it?
Sit out opening day
Unfortunately, it doesn't look as if Yelp will regain its shine anytime soon, especially once investors actually take a look at its balance sheet. Another problem is the site's dependence on Google for traffic, much like online game developer Zynga
In general, however, it seems that investors would do themselves a favor by skipping opening day for these Internet-based companies (hint: Facebook) and jump in a day or two later. At that point, there might actually be some bargains.
While the next wave of Internet stocks certainly holds promise, they don't hold a candle to the kind of potential we see in some other tech stocks. To be sure, the mobile revolution is fully under way and it's changing the very face of computing. To help our readers understand the massive trend, The Motley Fool recently compiled a research report titled "3 Hidden Winners of the iPhone, iPad, and Android Revolution." Better yet, we made it free to our readers. If you want to see exactly which stocks we think have the potential to be long-term winners, just click here to access your free copy today.
Fool contributor Amanda Alix owns no shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of LinkedIn. 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.