Web Boom renewal of by IPO

Friday, March 2nd 2012. | Internet News

IPO YelpThe investor frenzy for fast-growing Internet companies resurfaced Friday as the stock price of business-reviews site Yelp Inc. jumped 64% in its market debut.

The San Francisco-based company, which makes money mostly by selling advertising on its website to mom-and-pop stores, has piled up a string of losses since its founding eight years ago.

But the red ink didn’t stop investors from pouring into the initial public offering which priced above expectations at $15 a share on Thursday night. By the 4 p.m. close Yelp’s shares reached $24.58, making it the latest consumer Internet company to experience a big first-day trading lift.

Yelp, which is now valued at $1.47 billion, could be the last well-known online consumer brand to go public before Facebook Inc.’s impending IPO expected in the coming months.

But some investors are wary of a future fizzle for Internet stocks. Many of the recently public Web companies’ shares declined after their debuts last year, including daily deals company Groupon Inc. and Yelp rival Angie’s List Inc. Career-networking site LinkedIn Inc. had a first-day pop of 109%, but shares have since fallen about 7%.
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“It’s not like in 1998, where IPOs would double on the first day and just keep going up,” said Jeffrey Cohen, a partner in the capital markets group at the law firm Linklaters. “Skepticism sets in after the euphoria, and it’s hard to see that changing.”

Still, the investor fervor in Yelp’s stock may help allay some concerns that the appetite for new issues of fast-growing technology companies was waning, after the initial disappointing performance of online games company Zynga Inc. Its stock fell 5% below its IPO price a day after it listed, though it has since traded back up.

“It’s clear that markets are evaluating each of these companies individually, and not as a group,” said Lise Buyer, the founder of IPO advisor Class V Group. Zynga, she said, traded down until investors got information about its business from Facebook’s recent IPO filing.

All of this sets the scene for Facebook, which filed last month for an IPO that is expected to raise around $10 billion at a valuation of up to $100 billion. The Menlo Park, Calif., social network is anticipated to be the biggest-ever U.S. Web IPO.

Yelp’s case may have been helped by its relatively low profile. Unlike companies such as Groupon, investors hadn’t been actively trading Yelp on the secondary market or assigned it sky-high valuations, stoking demand for the stock on the public market.

A total of 17.5 million Yelp shares changed hands on Friday, more than double its float. That IPO float represented just 12% of the company’s outstanding shares, which is considered on the slender side. Lower float deals can witness bigger daily fluctuations in price but also provide a bigger first-day pop. Groupon and other Web companies also went public with small floats last year.

Yelp also has a publicly traded peer in Angie’s List, which can be used as a comparison. Angie’s List trades at about 11 times its 2011 revenue, while Yelp’s market value is at 17.7 last year’s sales.

The two companies have altered the way Internet-savvy consumers find companies, and are gunning for the local-business ad market once dominated by the Yellow Pages and local newspapers.

Yelp’s business is based on selling ads to local businesses, a potentially lucrative market that has long eluded Internet companies. Yelp, which once turned down a buyout offer from Google Inc., gets an average of 66 million unique visitors each month to post or read reviews of local businesses ranging from restaurants to hair salons. Its users have written a total of about 25 million reviews.

“When you are looking for a local business recommendation, you’re going to tap into the site that has the largest word of mouth possible,” said Yelp Chief Executive Jeremy Stoppelman.

But the cost of signing up local advertisers is so high that Yelp has never been profitable. In 2011, Yelp’s net loss swelled to $16.7 million from a loss of $9.6 million a year earlier, as the company booked net revenue of $83.3 million, up 74% from 2010.

“Yelp’s stock price is a triumph of hope over experience,” said Morningstar analyst Rick Summer. “The challenge for Yelp will be the high touch, expensive nature of the local advertiser will limit near-term profitability.”

Still, Yelp has a strong brand following, particularly among smartphone users, and has fundamentally changed the experience of researching local stores and services.

“I do go to Yelp for almost everything,” said Libby Kusuma, a 25-year-old Web designer in San Francisco, who has been using Yelp for the last three years. “I find that people are pretty honest and blunt when writing reviews.”

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