Yelp (YELP) is getting ready for its IPO. Pricing should start on March 1, with the company issuing 7.15 million shares somewhere between $12- $14 per share. So, the company is looking to raise around $100 million at a valuation of $778 million.
There's only one word to describe this: overvalued. What bankers and Internet entrepreneurs do not realize is that the Internet is primarily a cost-savings mechanism. Yes, it is disruptive, but it's about pushing prices down -- A LOT. This means that all the numbers are supposed to be getting smaller: revenue, costs, employees, valuation. The only exception is numbers that measure profitability, like return on employee or profit margins.
In the case of Yelp, it's probably easiest to see how this company is so overvalued when one looks at its revenue model. Internet marketer Raymond Fong has a scathing -- and, unfortunately for Yelp, accurate -- analysis of Yelp's advertising model in his post entitled, "Is Yelp Ripping People Off?" The short story is that Yelp is trying to charge upwards of $100 per thousand impressions. In another scathing review, columnist Rocky Agarwal cites $600 per thousand impressions as a number some local advertisers are paying.
If you're familiar with Internet advertising models, you know this is ludicrous. It's like trying to charge $1,000 for a sandwich (or, for my fellow hyperinflationistas, half an ounce of gold). The king of all things advertising, Google, is charging much, much less. Like try 99% less.
Josh Constine comes to Yelp's defense, arguing the ads are worth it because they are so targeted and thus can convert better. This may possibly be true, but there are two simple problems:
- If Yelp wants to use that argument, they should evolve to a cost-per-click or cost-per-sale model rather than selling on the basis of impression.
- Google ads are extremely relevant, as they are based on the search query and the obscene amount of information Google has on people -- and Google isn't charging this much. There is also the issue that these ads compete on a virtually identical basis with Google (same pricing model and value proposition) and it is an especially poor idea for a startup to so directly compete with an established incumbent in regards to revenue sources.
But that's not all! It gets worse. In addition to unsustainably high prices is the fact that Yelp, which reported a net loss of $16.7 million in 2011 (bigger than 2010's net loss of $9.6 million, showing the company is headed in the wrong direction on the income statement), is that the IPO valuation is being priced at 9.3X last year's sales. Google trades at 5.2X sales, and Yahoo trades at 3.8X sales. So basically, Yelp trades at an excessively high multiple of unsustainable revenues.
Now, Yelp does have some redeemable assets, and if the company were to use them properly -- something I find extremely unlikely -- it is possible this IPO could become something other than an embarrassment. Yelp's main asset is its active member base, user-generated content, and its phenomenal rankings in search engines. Because of these assets, Yelp is actually uniquely positioned to launch its own search engine and create even more user-generated content that could form the basis of a new media empire. If this avenue were successfully explored, Yelp could conceivably displace Google as the king of search. For those who, like I, believe that the next major search engine will have its roots as a social media powerhouse -- that social disrupts search -- Yelp has some major potential in this regard. But to effective pursue this angle, Yelp needs a new monetization model, as well as a focus on more than generating more quality content besides just local reviews.
Ultimately, Yelp is another sham of an IPO that does little more than create a speculative frenzy and sully the reputation of Internet companies, the stock market in general, and the bankers like Goldman Sachs (GS) that make this IPO possible. Like the rest of the stocks in Bubble 2.0, I think Yelp is only of interest to daytraders at its current proposed price and valuation.