Yelp’s (NYSE:YELP) 64% opening day bounce on its IPO and the resulting $1.4 billion market cap for the unprofitable Web 2.0 site remind me a lot of the bad old days. And I’m apparently not the only one.
Opening at $15 and closing at $22 was a shock to one analyst quoted by the Merc, who focused on the plethora of local advertising competitor:
Morningstar analyst Rick Summer, who pegged Yelp's value at $9 a share in a pre-IPO report, said in an interview Friday that he was "shocked" at the stock's rise, saying, "We have entered into a little bit of Crazytown, U.S.A."
"There's other ways for businesses to put their best foot forward with Groupon, LivingSocial, Foursquare, Google, Facebook and more," he said. "It's not clear that Yelp has a hold on that slice of the market."
As with Web 1.0 companies, the social media companies hope to attract eyeballs and stickiness to build network effects to keep out potential competitors. Much as it was 15 years ago, the goal is to grow fast (despite the obvious risks) or die trying.
The problem — as noted by many analysts — is the idea of a point-product web offering seems a bit passé. Facebook (NASDAQ:FB) , LinkedIn (NYSE:LNKD), Google (NASDAQ:GOOG), Foursquare and Groupon (NASDAQ:GRPN) and others are all trying to crowd each other’s market — with mixed results. Nonetheless, a plan of using market share and IPO wealth to keep out startup rivals doesn’t work so well when faced with a Google (or soon-to-be-public Facebook).
One recent trend is the tendency to use a small float and thus artificial scarcity of stock to create a sense of urgency among investors and thus support the stock price. As the
Wall Street Journal reported:
A total of 17.5 million Yelp shares changed hands on Friday, more than double its float. That IPO float represented just 12% of the company's outstanding shares, which is considered on the slender side. Lower float deals can witness bigger daily fluctuations in price but also provide a bigger first-day pop. Groupon and other Web companies also went public with small floats last year.
Don’t get me wrong. I love Yelp, find it invaluable for finding a restaurant in a strange location, and wish it nothing but the best. However, it’s beyond me how it can sustain a billion-plus market cap with a -19% profit margin and such a bevy of powerful competitors.