Bloomberg News

Yelp’s IPO Puts Consumer-Review Site in Front of Own Critics

February 29, 2012

Yelp Inc. (YELP), the site that lets users review everything from diners to dentists, is about to face its own critics: investors.

The company is holding its initial public offering this week, putting its business under the microscope as Google Inc. and Facebook Inc. push deeper into the local advertising market, its main source of revenue. The IPO is set to raise as much as $100 million, which would value Yelp at about $838 million.

Yelp will have to convince shareholders it can ward off competition from larger rivals to justify a price that values it at up to 10 times annual sales, twice as much as Google. While enthusiasm for Internet offerings may boost Yelp in its first day, the company may lose momentum if investors gravitate to contenders with larger customer bases and more cash for expansion, said Huntington Asset Advisors’ Peter Sorrentino.

“I’m still a little troubled by the ad-driven model,” the money manager said of Yelp. “If you’re an investor, you could find yourself in the crosshairs of a pretty well-funded, pretty savvy competitor.” His firm oversees $14.5 billion.

Web portal Yahoo! Inc. (YHOO) already operates a local page that includes reviews in categories also covered by Yelp. Google, the world’s most popular search engine, aims to boost its local appeal with last year’s purchase of Zagat Survey LLC, the publisher of the burgundy restaurant guides for cities like New York and London. Google traded at about 5.3 times sales as of yesterday.

Facebook Threat

Facebook, which filed for the largest Internet IPO on record this month, also poses a threat. More small and medium- sized businesses are setting up fan pages and buying ads to promote themselves on the social-networking site, said IDC’s Karsten Weide.

“Local advertising is an interesting segment because it’s developing very fast,” said the San Mateo, California-based analyst. “Facebook will attract a lot of revenue from those small and medium local advertisers.”

To gain heft, Yelp began expanding beyond its U.S. home turf in 2009, eventually developing sites in cities such as London and Toronto. Chief Executive Officer Jeremy Stoppelman, a co-founder of the company, is hiring an international sales force this year as Yelp looks to start selling ads overseas, diversifying its revenue base, according to the prospectus.

“It’s a strong management team,” Dixon Doll, co-founder of venture-capital firm DCM Inc., told Betty Liu on Bloomberg Television’s “In the Loop” today. “They have a lot of upside potential in the international markets.”

Sales Growth

Revenue rose 74 percent to $83.3 million last year, with local ads accounting for 70 percent of that and brand advertising making up most of the rest. The company hasn’t posted a profit since at least 2007, according to the prospectus.

Yelp and the Yelp Foundation, the only selling stockholder, are offering 7.15 million shares at $12 to $14 each, a regulatory filing shows. The proceeds of the IPO will go toward general corporate purposes and expanding Yelp’s financial flexibility, according to the filing.

Goldman Sachs Group Inc. is leading the offering, which Citigroup Inc. and Jefferies Group Inc. also are working on. Chantelle Karl, a spokeswoman for San Francisco-based Yelp, declined to comment.

Yelp’s valuation could exceed the top end of the range because the company has established itself as a leader in reviews, said Anupam Palit, a senior equity analyst at New York- based GreenCrest Capital Management LLC.

Stock Environment

“The thing that Yelp did very differently from everyone else is they kind of built themselves as a social platform from day one,” Palit said. Yelp throws parties for top reviewers in cities across the U.S., giving a social incentive for descriptive and honest reviews, said Palit.

The company’s biggest investors, including Stoppelman, aren’t selling shares in the offering. The former PayPal Inc. executive will hold about 11 percent of the voting power in Yelp following the share sale. Bessemer Venture Partners and Elevation Partners will each have about 22 percent.

Yelp is one of a handful of companies that have scheduled U.S. IPOs in the next month as the stock market continues to climb. Yesterday the Standard & Poor’s 500 (SPX) Index advanced to the highest level since 2008, bolstered by improving economic prospects globally.

Trading Landscape

While Internet IPOs of last year such as Groupon Inc. and Pandora Media Inc. have fallen below their highs, LinkedIn Corp. and Zynga Inc. (ZNGA), the social-gaming company partnered with Facebook, had both risen more than 20 percent this month through yesterday.

“If they come to market in early March with a good stock market like we have today, then I suspect this thing will trade pretty well,” Paul Sweeney, an analyst at Princeton, New Jersey-based Bloomberg Industries, said of Yelp.

Still, investors are going to be more cautious this year than last, according to GreenCrest Capital’s Palit.

“If Yelp had IPO’d last summer I think the premium could have been potentially a lot higher,” Palit said. “But they needed to get their business a little higher up and running.”

To contact the reporters on this story: Anjelica Tan in New York at atan224@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Tom Giles at tgiles5@bloomberg.net


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