Based in San Francisco, Yelp! (YELP) scheduled a $93 million IPO with a market capitalization of $780 million, at a price range mid-point of $13 for Friday, March 2, 2012.
YELP is one of six IPOs scheduled for this week (see our IPO calendar).
Several months ago there was talk of YELP IPO'ing at a market capitalization of one to two billion, which we said was high. The current price range mid-point valuation of $780 million is much lower.
We believe YELP will 'pop' on the IPO because it has 66 million active users, and we expect some of them to be 'overly enthusiastic' in YELP IPO after-market.
However, it appears that YELP is priced within the valuation range of companies such as Angie's List (ANGI), Groupon (GRPN) and Jive (JIVE) and doesn't deserve much of a premium. Also see 'red flags' below.
YELP is worth a speculation if your broker will let you sell in the first week. It's a small IPO and may have enough demand from its 66 million users to maintain a high stock price (relative to underlying fundamentals) initially.
If the red flags identified below become real issues over time then YELP may not be worth the longer term risk.
POTENTIAL RED FLAGS
Relies on potential competitors for traffic
"Google (GOOG) in particular is the most significant source of traffic to our website accounting for more than half of the visits to our website from Internet searches during the year ended December 31, 2011."
"Google has removed links to our website from portions of its web search product, and has promoted its own competing products, including Google's local products"
S-1-, page 7
Rate of revenue increase declines
Revenue increase over the prior dropped from 19% in the June, 2011 quarter to 14% for the September quarter to 12% for the December quarter - not good going into an IPO.
Rate of increase in unique visitors declines
Unique visitors increased 18% in the September quarter over the June quarter but increased only 8% comparing the December quarter with the September quarter - not good going into an IPO.
Sales & Marketing costs decline
(perhaps to reduce loss rate)
While sales and marketing costs as a percent of revenue dropped to 64% (still very high) in the December quarter from 67% in the September quarter - perhaps this was done purposely to help reduce the loss.
No explanation for a $6 million charge in the December quarter
"Contribution to The Yelp Foundation. In November 2011, our Board of Directors approved the establishment of The Yelp Foundation, a non-profit organization designed to support consumers and businesses in the communities in which we operate. Contributions made to The Yelp Foundation consist of the issuance and contribution of 520,000 shares of our common stock in the form of a charitable contribution to The Yelp Foundation during 2011. We do not expect to make future contributions to The Yelp Foundation."
S-1 page 57
YELP offers no further explanation, even though that $6 million charge is 24% of revenue for the December quarter. The lack of further explanation is bothersome.
Dual stock classes
Class B common (insider) stock will represent 98.7% of voting power post-IPO. That's over-the-top, unnecessary and raises the question "what do they know that we don't know?"
Yelp connects people with great local businesses. YELP users have contributed a total of 25 million reviews of almost every type of local business, from restaurants, boutiques and salons to dentists, mechanics, plumbers and more.
These reviews are written by people using Yelp to share their everyday local business experiences, giving voice to consumers and bringing "word of mouth" online. The information these reviews provide is valuable for consumers and businesses alike.
66 million unique visitors used YELP website, and YELP's mobile application was used on 5.7 million unique mobile devices, on a monthly average basis during the quarter ended December 31, 2011.
YELP's business revolves around three key constituencies: the contributors who write reviews, the consumers who read them and the local businesses that they describe.
As of December 31, 2011, YELP was active in 46 Yelp markets in the United States and 25 Yelp markets internationally. This footprint represents a fraction of the potential domestic and international markets that we are currently targeting for expansion.
Domestic expansion plans include growth in existing markets as well as expansion into new markets, many of which are smaller than current markets, as YELP looks to expand its breadth of coverage.
Internationally, YELP is in the early stages of establishing its footprint. YELP is targeting a mix of both large and small markets. penetration, proximity to existing markets, number of local businesses and local ad market growth rate.
YELP competitors include, among others; offline media companies and service providers; newspaper, television, and other media companies, Internet search engines, such as Google, Yahoo (YHOO) and Bing; and various other online service providers.
In particular, major Internet companies, such as Google, Facebook (FB), Yahoo! and Microsoft (MSFT) may be more successful than YELP in developing and marketing online advertising offerings directly to local businesses, and many of YELP's advertisers and potential advertisers may choose to purchase online advertising services from these competitors and may reduce their purchases of YELP's products
USE OF PROCEEDS
YELP expects to net $82 million from its IPO, to be used for working capital and general corporate purposes.
Additional disclosure: YELP is expected to price Thursday evening for trading Friday. YELP is the focus ticker.