MarketWatch: Yelp IPO surges despite valuation worries

Review site trades at sharp premium to Internet peers – Scott Rostan quoted: 

By Dan Gallagher, MarketWatch

SAN FRANCISCO (MarketWatch) — The excitement that greeted Yelp Inc. in its public-market debut on Friday may be tempered in the coming weeks as investors better digest the company’s financial performance, analysts said Friday.

Yelp YELP +64.27%   completed its initial public offering, with its shares jumping more than 60% by midday Friday to $24.32 from its IPO price of $15, above the previously expected range of $12 to $14 per share. The company priced 7.15 million shares late Thursday, giving the deal a total market value of about $107 million.

The San Francisco-based company, which specializes in online reviews of local businesses, intends to use the proceeds for general corporate purposes that may include marketing, capital expenditures and possibly acquisitions.

Yelp has become an incredibly popular tool for local commerce. The company claims about 66 million unique monthly visitors, and hosts about 25 million reviews on its site. Total revenue soared last year by 75% to $83.3 million, with more than two-thirds of that coming from advertising sold to local business.

But Yelp has also failed to generate a profit to date, and spends about two-thirds of its total revenue on marketing. It racked up a net loss last year of $16.7 million compared with a loss of $9.6 million the year before.

“While I think it’s a fantastic product, the shares seem to be getting a little ahead of the fundamentals,” said Scott Rostan, a former Merrill Lynch analyst who is now chief executive of Training the Street, which provides courses for stock analysts and traders.

Rostan also said the market’s recent overall gains are likely one factor into the strong reception for Yelp, noting the recent highs for both the Dow industrials DJIA -0.04%   and the Nasdaq Composite Index COMP -0.34%  .

“There could be some euphoria here that investors are trying to ride,” he added. “I would argue that, for this type of company without profits, the shares are not trading on fundamentals.”

Yelp is trading at a high multiple relative to past sales. Its current share price puts the stock more than 17 times revenue for the last 12 months — far above similar measures for more established Internet companies such as Google Inc. GOOG -0.09%  and Inc. AMZN -0.11%  , which trade at 5.3 times sales and 1.7 sales respectively.

Groupon Inc. GRPN -1.49%  , the daily-deals site that also focuses on local merchants, trades about 6.4 times sales, according to data from CapitalIQ.

Wedbush Internet analyst Michael Pachter pointed to another worrisome issue in Yelp’s financial statements. The company says it has about 606,000 “claimed local businesses,” referring to the merchants that visit the site and “claim” the free page, which allows them to post other content such as pictures, menus and other details.

Of those claimed businesses, Yelp only has claimed revenue from about 24,000 “active business accounts,” though that number has jumped by 109% from the prior year.

“I think the Street is giving Yelp a lot of credit because of all the user reviews on the site,” Pachter said, adding that investors may be seeing the large upside potential to sell ads. “I just can’t tell you how to get to this kind of valuation through that.”

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