How Many Stars Would You Rate Yelp's IPO?

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YelpWith all the sturm und drang surrounding Facebook's upcoming May IPO, few media outlets are giving much oxygen to the IPO of online review hub Yelp, due March 2.

The San Francisco-based Web startup hopes to raise as much as $100 million. Shares will be priced between $12 and $14 and trade under the ticker YELP.

A stock price in this range will give Yelp a market cap of around $800 million. That's quite a sticker price for a company whose purpose is to help you discover what your neighbors think of the Chinese takeout place down the road.

Useful, Sure, but Worth a Billion Dollars?

Yes, Yelp.com is both utilitarian -- and quite popular. The site boasts 25 million user-generated reviews and receives more than 60 million monthly unique visitors.

But here's the kicker: The company isn't profitable. Last year, Yelp had revenues of $83 million and losses of almost $17 million.

Yelp's revenues come solely from ads purchased by small businesses such as boutiques, salons and restaurants that seek to catch consumers' attention as they cruise through reviews of local hot spots. In other words, this is an "ads and eyeballs" business, not a model that makes most investors want to call up their brokers.

One More in a Sea of Frothy Valuations

Perhaps investors have gotten over their sticker shock when it comes to Web 2.0 companies. After all, Zynga (ZNGA), Pandora (P), Groupon (GRPN), and LinkedIn (LNKD) have all recently gone public at seemingly frothy valuations. And there's always the possibility that Yelp could grow into its rather ambitious market cap.

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At least one big industry player has taken notice of Yelp. In December 2009, the blog TechCrunch reported that Google (GOOG) and Yelp were in "advanced acquisition negotiations" with the search giant offering a reported $500 million-plus. However, for undisclosed reasons, the deal was never completed.

Yelp's Fraught Relationship with Search Engines

While Yelp seems to have maintained a positive relationship with Google, any change in this relationship could prove problematic: Half of Yelp's traffic comes from the search engine. That doesn't exactly put Yelp in control of its own destiny.

In fact, the company points out as much in its S-1. "We rely on traffic to our website from search engines like Google, Yahoo! and Bing, some of which offer products and services that compete directly with our solutions. If our website fails to rank prominently in unpaid search results, traffic to our website could decline and our business would be adversely affected."

That's not terribly reassuring.

Rate This IPO

So who will buy piping-hot Yelp stock on its Friday coming-out party? Probably not the discerning, budget-conscious, and sometimes-fussy consumers who post all those reviews on Yelp.com. That leaves the professional investing class -- namely, hedge funds and institutional investors. At least the pros can afford to lose a bit in case Yelp's prospects never pan out.

Disagree, DailyFinance reader? Rate Yelp's IPO in the comments section below.






Motley Fool contributor Catherine Baab-Muguira does not have any financial interest in any of the companies mentioned. The Motley Fool owns shares of LinkedIn and Google. Motley Fool newsletter services have recommended buying shares of Google and LinkedIn.


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