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Will Investors Love Yelp?


The business-review site faces serious headwinds, but its growth is something to behold.

The user-generated business-review site, Yelp Inc. made its debut on the markets today. The stock is now trading on the New York Stock Exchange under the ticker (YELP). The company set the initial valuation of $15, a bit higher than expected. It opened the day even higher, at $24.65.

This sets Yelp's value at about $900 million. Seems like it was smart to spurn Google's (GOOG) $500 million offer for the company in 2009.

Does this valuation reflect a solid company, or is this a throwback to the irrationally high valuation of late '90s tech companies?

Yelp has a lot going for it. The product itself is very well-liked by netizens. It's biggest strength is its dedicated and engaged users. In today's world, the opinion of the crowd is trusted over that of a pretentious newspaper restaurant reviewer's and Michelin stars. The user base is growing fast, and so is revenue. In 2011, revenue jumped by 74% to $83.3 million. Most of Yelp's revenue comes from advertising from local businesses. A disproportionate share of ad revenue comes from markets where Yelp is most established, like San Francisco and New York. The site brings in 66 million visits a month, and users have posted 25 million reviews so far. With momentum like this, it isn't too generous to foresee Yelp dominating online word of mouth in the coming years.

A closer look at the company's financials should give investors pause, however. The fact is that Yelp hasn't made a profit since it went live in 2004. Last year, the company lost $16.7 million. This isn't usual for a young company that needs to expand market share and grow revenue. Yelp's operating costs are high and rising. In one quarter, operating costs were as much as 67% of revenue.

The business that Yelp is in has hardly any barriers to entry, and bigger sharks are circling.

One company that Yelp made completely irrelevant was Zagat, which was recently purchased by Google. Yelp should be afraid that Google might push harder into the local ad and restaurant-review business. Yelp's IPO filing acknowledged that Google is a key source of traffic. When Google prioritized Google+ results over Twitter results in social search, it proved that it isn't above using its search might to push rivals down. This could jeopardize Yelp's growth. Other companies like Facebook and nearly identical competitor Angie's List (ANGI) will also be competing for local ad dollars.

In the first few hours of trading, Yelp already popped up by over 66%. Whether Yelp's stock will hold onto its five stars, only time will tell.

Twitter: @vincent_trivett
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No positions in stocks mentioned.
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