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Yelp.com: The Next Chapter in the Tech IPO Saga

February 27, 2012

Stock of the Day

This year, it seems like the market headlines have been dominated by one tech IPO after the other. Less than a month ago, talks of a Facebook IPO stole headlines. This time, Wall Street is buzzing about the impending initial public offering of Yelp.Inc, the company that operates social networking site Yelp.com.

Of course, not all social networking sites are created equally, so before judging the merits of this stock, we need to dig in what exactly Yelp.com does. Founded in 2004, Yelp.com is designed to help people search for local businesses, including everything from restaurants and bars to dentists and hairstylists. Over the years, the site has grown in popularity—it attracted over 65 million unique visitors per month in the last quarter alone. The site also allows users to rate and review establishments; those with a free account are called “Yelpers.” The company incentivizes helpful reviews by offering special events to their most prolific and well-respected Yelpers; this way, Yelp.com has achieved a reputation for its quality ranking system and has amassed over 25 million reviews. Business owners are also welcomed to open a free account to post photos and promote their business.

Now, like most social networking sites, Yelp.com receives its revenue by selling ads to local businesses. With the way the website is set up, these ads are targeted to people who live in a specific area or have plans to visit it. The company offers customized plans for each client, depending on the size of the business or brand. With its targeted ads and high levels of traffic, Yelp.com remains an attractive forum for advertising. In fact, just a few years ago, Google Inc. (GOOG) set its sights on Yelp and offered $500 million, only to be turned down.

However, even though this company boasted 74% year-over-year growth in 2011, Yelp.com has yet to be profitable. The company’s sales and marketing costs remain high, and Google.com has launched a competing service, even going so far as to cut links to Yelp.com from portions of its search engine. In its recent annual report, the company posted a $16.9 million net loss for 2011, up from a loss of $9.7 million in 2010.

Now, the IPO process began a few weeks ago, and it is now in its final stages; the stock is set to begin trading this Friday, March 2. Last week, the company set an IPO target of $12 to $14 per share, which could bring as much as $115 million from the start. This places the company value at around $840 million.

Although I’m happy that the Yelp IPO has reenergized the market, I’m skeptical about diving head-first into this stock. Like I mentioned in my post about the Facebook IPO, tech stocks tend to be volatile from their first day of trading. So, if you don’t think you can stomach a potential double-digit loss from the get-go, hold off for now. There are plenty of fundamentally strong internet software & services stocks out there that you can work with in the interim.

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