Here Comes Yelp

By Eric Volkman - February 18, 2012 | Tickers: GRPN, LNKD, P, YELP, ZNGA | 0 Comments

• Email
• Print

Another day, another Internet IPO. Have we time-traveled back to 1999? It's starting to look that way, as more and more known companies with a .com after their name and puddles of red ink arrive on the market. Next in line is Yelp (NYSE: YELP), the popular online business review site, which will become a traded stock early next month.

The company has never made money and doesn't have much of a plan as to how it'll start doing so. But so what? They'd be foolish not to capitalize on the IPO trend. After all, going public has in recent months has enriched other firms with well-known names and bad financials. When Groupon (NASDAQ: GRPN) hit the market last November it traded more than $6 above its $20 IPO price, despite never having earned a dime in profit. Pandora (NYSE: P), a company with at least the occasional positive bottom line over the years, did better at nearly 9%.

Optimists point to very strong top-line growth for both companies as reason to believe in them. It's questionable how long that will last, though. Groupon posted $1.25 billion in gross billings this past (fourth) quarter, representing an 8% increase from 3Q. But the latter figure for the previous quarter was substantially higher, at 25%. Pandora anticipates revenue, at the top end of the company's expectations, to have doubled on an annual basis in its recently finished fiscal year. Which is excellent... except that the previous year-on-year increase was 150%.

A company in slightly better shape is online game creator Zynga (NASDAQ: ZNGA), which at least had a winning streak of quarterly earnings for most of 2011. Like GRPN and P, however, its revenue growth is tapering noticeably. And that profitability streak is over, as the company posted a queasy $435 million loss in its most recent quarter.

Investors seem to be losing patience with such stocks; the novelty appears to be over and reality is creeping in. The share prices reflect this -- Groupon, at $20.26 trades barely above its IPO price (but lower than the close of its first day of trading), while Pandora has dropped almost 25% from its debut listing. Relatively speaking Zynga isn't doing badly (its shares are around 30% higher at $12.93), but this could be due more to a coattail effect since the company is heavily dependent on chief business partner Facebook, the upcoming smash hit IPO of the year and thus a firm that will have much deeper pockets in the immediate future.

There are freshly minted shares out there that have performed well, however this is the exception rather than the rule. LinkedIn (NYSE: LNKD) is a rocket that currently trades at just over $93, more than double its IPO price. It's a different animal than its recent IPO brethren, though, with revenue growth that's still humming along and recent quarters that have been profitable more often than not. Its profit margins are thin and there's little sign that'll change, but compared to a Zynga, Groupon or Pandora such performance is encouraging.

Yelp belongs to that crowd, and even among that bunch its results don't look good. After the company nearly doubled its revenue year-on-year in 2010, it only had a 74% climb the following year. And profitability? Forget about it. $16.9 million was the shortfall for 2011, the deepest in a series of red bottom-line figures dating back to at least 2006. The company's brand name is well known and many thousands of users contribute to its reviews of local shops and restaurants, but this business model is easily replicable. Should a big, well-funded and determined rival decide to take it on directly, the ending might not be a happy one for Yelp.

For those still excited about fresh IPOs and thinking of snapping up some Yelp, the company has set a price of $12-$14 per share for the stock's first day of trading. But expect it to follow the pattern of a Groupon or Pandora; a modest rise on issue day, then a slide down to reality thereafter.

• Email
• Print
• Feedback