Yelp IPO's Profit Enigma: Is the Site Making Money?

Yelp IPO's Profit Enigma: Is the Site Making Money?
Yelp IPO's Profit Enigma: Is the Site Making Money?

After reading the breathless coverage in The Wall Street Journal, Bloomberg News, and The New York Times about the rumored $2 billion Yelp IPO, I have one question: Does the online-review site make money? None of the media reports made any mention.

In the new rush to bring high-flying tech companies public, profitability has become lost in the shuffle. The media chooses not to focus on it because the people who leak these stories chose not to discuss it. But it's the issue that should be first on investors' minds.

The Yelp IPO stories have all the hallmarks of a carefully crafted public-relations campaign. It's all anonymously sourced because the leakers -- the bankers, companies, and their PR people -- want to cover their tracks. The de facto "no comments" should not fool anyone. For one thing, the reports mentioned that Yelp was going to hire Goldman Sachs (GS) and Citigroup (C) to handle the public offering. To underscore the "hotness" of the deal, an anonymously sourced tidbit mentioned that Yelp rebuffed a $500 million takeover offer from Google (GOOG) about two years ago. Furthermore, the stories pointed out that Yelp's latest round of financing in January 2010 valued the company at $500 million. This raises a red flag.

The leakers of the story may have had good reason not to mention whether Yelp is making money: It could be losing money or, at best, be marginally profitable. The Journal mentioned that Next Up Research estimated that Yelp would earn $100 million in revenue in 2012, but there was no discussion of the basis of the forecast, nor any mention of what the company expects for 2011.

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Yelp, though, is hardly unique. Many other hot IPOs have weak balance sheets and are getting premium valuations.

Rival Angie's List, which recently filed to go public, said in its S-1 filing with the Securities and Exchange Commission that it had an accumulated deficit of $143.2 million as of this past June 30. The IPO would value the Indianapolis-based company at as much as $114.3 million in its initial public offering.

LinkedIn (LNKD), the business social network, recently reported second-quarter net income of $4.5 million, or 4 cents a share, on revenue of $120 million. Even that small profit was a pleasant surprise for Wall Street analysts, who had expected a loss. Groupon (GRPN), which recently had the biggest IPO since Google, incurred net losses of $389.6 million and $102.7 million in 2010 and the first quarter of 2011, respectively, according to its S-1 filing with the SEC. Its accumulated deficit was $522.1 million as of March 31.

Yelp offers a great service, but it's not one that's terribly difficult to duplicate. Competition for the local advertising dollar will only intensify. As Bloomberg noted, the company has scaled back its foray into the daily-deals business after realizing that it couldn't compete against Groupon.

Until its path to profitability is certain, investors should avoid Yelp's stock.

Jonathan Berr owns no shares of the aforementioned stocks. Follow him on Twitter, where he goes by @jdberr.

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