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Yelp IPOs, Triples Revenues In Three Years, But Still No Profit

Posted on Friday, Mar 9th 2012

A number of technology IPOs continue to flow to the market this year. Although Facebook’s IPO may be the most anticipated, another social media player, Yelp, tested markets this year. Through their offering last week, the company raised $107 million by selling their stock at $15 a share. Yet their monetization capabilities still raise concerns.

Yelp’s Financials
Yelp’s (NYSE:YELP) revenues for fiscal 2011 grew 74% over the year to $83 million. But the company has yet to post a profit, perhaps in part because it spends more than 65% of revenues on advertising and marketing. According to their S-1 filing, the company’s revenues have more than tripled over the $25.8 million reported in 2009. However, losses have widened during the same period. In 2009, Yelp recorded a loss of $2.34 million, which grew to $16.9 million last year.

The company claims to have more than 66 million unique visitors monthly accessing more than 25 million reviews on their site. Mobile traffic has also grown and accounted for more than 5.7 million monthly unique visitors last quarter. Despite the high levels of traffic, Yelp’s monetization rates remain low. Of the more than 600,000 local businesses that have their listings on their website, only 24,000 were paid listings. Yelp relies heavily on advertising revenues and unlike competitor Angie’s List lets users access their reviews free.

Yelp’s Competition
Analysts have been worried about Yelp’s dependence on Google. Yelp gets more than 50% of their visitors from Google search results. Google’s recent acquisition of Zagat has led to their promoting Zagat and removing links to Yelp from Google sites.

Concerns Among Local Businesses
Recent comments about Yelp from the local businesses reviewed on their website have not been positive. Businesses are concerned about Yelp’s review filtering algorithm. The company does not divulge their filtering process, which, the businesses claim, does not work properly and filters out many meaningful reviews.

Yelp aspires to be the “Amazon of local” advertising and information, which they believe is a $100 billion market. They want to become the source with the “broadest and deepest” content on local businesses. To achieve that goal, Yelp will have to ensure their review process is unbiased and transparent, and they can combat Google, the source of most of their traffic.

Meanwhile, their newly listed stock is trading at $20 with a market capitalization of $339.12. The stock had reached $26 last week shortly after it listed. In my opinion, the risks are far too high with this business even though I am an avid user of their mobile and online service. They need to find ways of lessening their dependence on Google, and also ways of monetizing their vast audience. There are ways of doing so. It needs to become a priority, though.

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