Yelp soars in market debut on Facebook optimism
Consumer review website Yelp Inc made a sparkling market debut on Friday, buoyed by optimism ahead of Facebook's public listing and hopes for further successful public listings by Internet companies down the road.
Yelp's stock closed 64 percent higher at $24.58, a day after Yelp priced its IPO at $15 a share - above its indicated range of $12 to $14.
At Friday's closing price, the company is worth about $1.47 billion - about 17 times its 2011 revenue.
"If you look at it, there's been a very high trading volume, much higher than normal," said Scott Rostan, a former Merrill Lynch analyst who founded Training The Street, an investment banking school in New York.
Yelp could be benefitting from the optimism about Facebook's upcoming IPO, he added. "Investors are getting a little excited; there's a social media momentum."
Yelp's stellar debut follows those of other Internet sensations like LinkedIn Corp, Groupon Inc and Zillow Inc. But while those stocks made large first-day gains, they have since declined.
Groupon stock's soared as much as 56 percent on its opening day, but has since fallen below its offer price of $20.
Like Yelp, Groupon is losing money. Yelp generates revenue by selling advertising on its sites, where it has more than 25 million reviews of a range of local businesses and services - from plumbers and shoe-repair shops to restaurants and nightlife options.
Yelp also competes with Angie's List, which unlike Yelp charges for memberships and whose stock fell 5.4 percent on Friday.
"Angie's List charges for memberships. That will prevent growth. It can maybe grow to 2 million memberships, but there's a finite number of people who want to pay to access this content," Sameet Sinha, an analyst at B. Riley & Co, said.
"Their unique visitor growth accelerated in the past year and they are forecasting solid growth over the next few years," Sinha said.
The company, however, faces stiff competition from Facebook; Google Inc, through its recent buy of restaurant reviewer Zagat; and others like Groupon and Angie's List.
Stoppelman told CNBC that he was not fazed by competition from the likes of Google.
"That's a potentially lucrative market, which could be interesting for some big companies such as Google, Facebook to muscle in," Rostan said.
"It could make Yelp a takeover candidate. As a public company it is a little harder to turn down an offer and it could be a $2 billion morsel for an established company to enter that market," he said.
According to media reports, Yelp has rejected approaches by Google and Yahoo in the past.
Amazon of local advertising
The San Francisco-based company was started eight years ago in 2004 by former PayPal engineers Jeremy Stoppelman and Russel Simmons, when Stoppelman needed a doctor and online searches turned up only generic lists on health insurance websites.
Stoppelman, a computer engineer by training, told CNBC he wanted his company to become the Amazon.com Inc of local advertising.
"We're just scratching the surface of local advertising," Stoppelman said. "It's an enormous market."
Yelp had 66 million unique visitors and was used in 5.7 million unique mobile devices on a monthly average basis in its latest quarter. It was active in 46 markets in the United States and 25 internationally at the end of last year.
But the company has incurred losses since inception, and had an accumulated debt of about $41.2 million as of December 31.
In 2011, Yelp recorded a loss of about $17 million but saw revenue jump 74 percent to $83.3 million.
Like a slew of recent tech and Internet offerings and the upcoming Facebook IPO, Yelp will have two classes of stock - class A shares worth one vote each and class B shares with 10 votes each.
This structure is seen by many as a method to keep voting power restricted to the major stockholders as the outstanding class B common stock will represent about 98.7 percent of voting power following the offering.
Scott said this may be the time for more Internet companies to seek a public listing.
"In the IPO market there's a window of opportunity, when it's open you better rush through it before it closes," Rostan said, adding that LinkedIn's IPO in May last year created a window until about August.
"There needs to be some kind of event to open it (the window) and Facebook might be that event," he added.
B. Riley's Sinha noted that Yelp was a good investment ahead of Facebook.
"In general, crowd sourcing, social and mobile are the key buzz words for investors and Yelp hits them all. Before Facebook comes along, this is a good social and mobile play for investors," Sinha said.
Goldman Sachs is the lead bookrunning manager for the offering, while Citigroup and Jefferies acted as joint bookrunning managers.