Yelp IPO Offers More Value Than Other Internet IPOs

| About: Yelp (YELP)

This year investors have seen IPOs from several high profile internet companies including LinkedIn (NYSE:LNKD), Groupon (NASDAQ:GRPN), Angies List (NASDAQ:ANGI), and Zillow (NASDAQ:Z). Zynga (ZYNG), the gaming site with strong ties to Facebook, is expected to come to market on December 15. Next on the horizon may be YELP, a reviews site similar to Angie's List. The company filed for an IPO on November 17 which will likely raise around $100 million and value the company at $1.5 billion.

The difference between Yelp and Angie's List is that users do not have to pay a fee for Yelp's services--the company derives most of its revenue from selling advertising to businesses. According to Money magazine, the company has over 22 million reviews of local businesses and raked in around $59 million in net sales during the first 9 months on 2011, compared with $47 million in revenue during 2010, $26 million in 2009, and $12 million in 2008.

According to its prospectus the company has drawn around 61 million unique visitors to the site "on a monthly average basis for the quarter ended September 30, 2011." The company is not yet profitable, but is much closer to the black than many other internet companies, which have made their public debuts this year. Yelp lost only $7.6 million through September. By comparison, Groupon and Angie's List lost $633 million and $43 million respectively during the same period. Yelp lost $8.6 million last year.

What is interesting about these numbers (besides the obvious fact that Yelp is a lot more responsible when it comes to spending than some other internet companies), is that the company is showing steady revenue growth and gradually shrinking losses. While not as spectacular as the growth of Groupon's sales (or red ink), the Wall Street Journal notes company's "approach to growth is far more measured" and consistent: revenue grew "about 80% each quarter this year." The company does note in the prospectus that its "recent growth rate is likely not sustainable" but even if "sales growth slows to 60% next year, the roughly $1.5 billion valuation Yelp is...seeking would be around 11 times next year's revenue...[very] reasonable in the context of Yelp's possible strategic value to a larger company such as Microsoft."

One potential problem however, is that nearly 50% of traffic to Yelp's site comes from internet searches on Google (NASDAQ:GOOG), which tried to buy Yelp for $500 million in 2009 and was rebuffed. Now, according to Yelp's prospectus, Google is "removing links to [Yelp] from portions of its web search product, and has promoted its own competing products...[which] could have a substantial negative effect on" operating results going forward. Given the value consumers place on reviews found on Yelp the hope is certainly that Yelp's brand will become recognizable enough in its own right to reduce its reliability on Google in the future. Already, Yelp is the go-to site for consumers who want to rate local business--as Forbes notes, it remains to be seen whether the company can find a way to expand the products and services it offers in a meaningful and profitable way.

Perhaps more disturbing is the fact that Yelp is not yet cashflow positive, unlike Groupon, which has generated cash for the past two years. However, the company is far closer to the black than it was last year in terms of cash flow, generating a negative $296,000 this year as opposed to negative $6.4 million in 2010, according to Fortune.

Overall, Yelp's long-term prospects look better than those of Groupon and other internet IPOs that are hemorrhaging money at a spectacular rate. Additionally, the company is seeking to raise less money in its IPO than Groupon, Angie's List, LinkedIn, and Zynga making it about as much of a 'bargain' as any nonprofitable company can be. If the company can continue to shrink its losses in the face of rising costs it could be profitable sooner rather than later--but that is a big if. Nonetheless the fact that the company has already received a large buyout offer in the past indicates its value to larger companies. Combine this with its disciplined approach to growth and it seems like a better bet than most of the other internet companies that have gone public this year. The company should go public in the first quarter of 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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