In 2003, Jeremy Stoppelman and Russel Simmons left eBay’s (NASDAQ:EBAY) PayPal. A year later, they joined up with the co-founder of the company, Max Levchin, to explore new Internet business ideas. One caught their attention: providing a new way for consumers to review merchants. They believed the traditional Yellow Pages were ripe for disruption.
So Jeremy, Russ and Max went on to create Yelp, which has since become a top player in the online reviews space and now is gearing up for an initial public offering. Yelp intends to sell 7.2 million shares at a range of $12 to $14, lead underwriters include Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and Jefferies (NYSE:JEF), and the company plans to list on the NYSE under the symbol YELP.
So what are the prospects of this online IPO? Here’s a look at Yelp’s pros and cons:
Pros
Popular Destination: Since inception, Yelp users have provided roughly 25 million reviews. They cover a wide range of local businesses, such as restaurants, mechanics, plumbers and dentists. Yelp attracts about 66 million unique users per month, and there are 606,000 claimed business locations on the site — up 97% over the past year.
Mobile: During the past few years, Yelp has made significant investments in this category, and they’ve made a big difference. The company boasts 5.7 million unique mobile users per month, and it has the top-listed free travel app in Apple’s (NASDAQ:AAPL) App Store.
Foreign markets: Besides the U.S., Yelp is in Canada, Western Europe and Australia. In other words, there’s plenty of room for global expansion, especially in Asia. Keep in mind that the company will begin to sell ads in international markets this year, which should provide a nice boost to revenues.
Cons
Losses: From 2008 to 2011, Yelp’s revenues have increased from $12.1 million to $83.3 million, but the company continues to sustain losses. For the past year, Yelp was $16.1 million in the red, worse than the $9.6 million in the year-ago period. The company continues to spend huge amounts on marketing, sales, product development and international expansion.
Dependence: Yelp gets large amounts of traffic from Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO) and Microsoft’s (NASDAQ:MSFT) Bing search engines, so a change in their algorithms or marketing approaches could have a big impact.
According to the prospectus: “Google has removed links to our website from portions of its web search product, and has promoted its own competing products, including Google’s local products, in its search results.” Not good when you consider Google alone accounts for well more than half of Yelp’s traffic.
Advertising: This accounts for much of Yelp’s revenues, but it isn’t easy to convince local businesses to pay ongoing fees. Also, about 62% of the cumulative reviews on Yelp have been from the restaurant and shopping categories. The company might have difficulty convincing other types of businesses to shell out advertising fees.
Verdict
No doubt, Yelp is targeting a huge market opportunity. There are 27 million local businesses in the U.S., which spend more than $113 billion in traditional offline advertising. However, so far, Groupon (NASDAQ:GRPN) has been the big winner, almost tripling revenues to $506.5 million in the latest quarter — compared to only $24.9 million for Yelp.
But despite its seeming strength and growth, Groupon has been a volatile stock, and GRPN shares currently trade below the IPO price.
So in light of Yelp’s losses and competitive challenges — as well as the wide swings in the IPO market — investors should stay away from the offering, at least early on.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook, All About Short Selling and All About Commodities. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
