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Mixed Reviews for the Yelp IPO

There's a reason why stocks don't need to line up people making purchases to write reviews and score them on a scale of five stars. The rise and fall of a company's share price acts as a pretty

There’s a reason why stocks don’t need to line up people making purchases to write reviews and score them on a scale of five stars. The rise and fall of a company’s share price acts as a pretty solid indicator of how people really feel about a stock.

However, with Yelp, the online restaurant reviewing website, due to hit the open market this week with the last major web IPO before Facebook, speculation and opinion remain the name of the game until investors can actually buy shares.

Yelp Anticipates a Valuation over $800 Million


Yelp is planning to offer 7.15 million shares at a price of $12 to $14 apiece, ultimately raising about $100 million and giving the company a valuation of about $838 million. And so the dance of the IPO begins. Opinions abound as to whether or not Yelp is actually worth that much and, until it hits the market, it’s hard to say how people will react. With last year’s crop of internet IPOs, including LinkedIn (LNKD), Groupon (GRPN), and Zynga (ZNGA) tended to start off red hot only to cool in the following month, it will be interesting to see if the opening day enthusiasm that has become common place will extend to Yelp.

“Yelp will probably do well early on, but then I see it drifting back down,” said Scott Sweet of IPO Boutique.

Some Have Doubts About Business

There are also plenty of skeptics as to whether or not Yelp is a sound investment at all. The company relies almost entirely on the local advertising revenues, a segment in which the site is competing with Google (GOOG) and Facebook (FB). This means that Yelp may be the whelp competing against well-funded, seasoned companies for the same dollars.

“Local advertising is an interesting segment because it’s developing very fast,” said said IDC’s Karsten Weide. “Facebook will attract a lot of revenue from those small and medium local advertisers.”

Yelp’s also struggling to turn a profit. The company may be impressing some investors with its 66 million in unique visitors each month or 74 percent growth in revenue, but sales still topped out at $83.3 million. This would mean that Yelp’s IPO valuation would be a tenth of its annual revenue. What’s more, Yelp isn’t profitable yet. Yelp lost $16.7 million in 2011, which was consistent with its performance over the last few years. The company has never turned a profit and deficits have grown larger every year since 2009.

“I’m still a little troubled by the ad-driven model,” Huntington Asset Advisors’ Peter Sorrentino said. “If you’re an investor, you could find yourself in the crosshairs of a pretty well-funded, pretty savvy competitor.”

Demand May Still Be Strong

Despite the warning flags going up about Yelp from some circles, there may still be relatively strong demand for the shares. As stated above, the growing revenues and 66 million visitors a month mean that Yelp is clearly attracting traffic and creating the ideal place for restaurants of all sizes to advertise.

“If they come to market in early March with a good stock market like we have today, then I suspect this thing will trade pretty well,” said Paul Sweeney of Bloomberg Industries.

Of course, no internet IPO can come and go at this point without some consideration of the mighty Facebook. With the internet giant’s highly anticipated IPO due later this year, it’s entirely possible that the fortunes of Yelp could rise or fall with Facebook’s whether fair or not.

As for Yelp’s ticker…it’s going to be YELP. How on earth is one expected to be able to remember that?

I’m pro-renewable energy. But I’m against worshiping any technology and blindly glossing over its drawbacks.