Yelp Shares: Investor Euphoria May Fade

Yelp got a short-term pop from its first day of trading, but in the longer term investors may want to stay away, as the company is still unprofitable eight years after it was founded.

Yelp , which compiles reviews for local businesses, has seen its revenue grow sharply, from $25.8 million in 2009 to $83.3 million in 2011, an increase of nearly 300 percent.

Losses, however, have continued to grow.

According to its S-1 filing, Yelp’s losses increased faster than revenue grew. Yelp lost $2.34 million in 2009, but it lost $16.9 million in 2011. The company has not turned a profit in the eight years since it was founded, which can be troublesome to investors in an uncertain market.

Yelp is highly dependent onGoogle for a “significant source of traffic,” and that relationship may break down, should Google decide to promote its own property, Zagat, instead of Yelp. In the S-1 filing, Yelp noted that Google accounted for more than half of the visits to its website in the 2011 fiscal year.

“Our success depends on our ability to maintain a prominent presence in search results for queries regarding local businesses on Google,” the filing said.

“Although I expect to see a pop at the open due to demand (Yelp was 20 times-oversubscribed), losses will likely continue to grow or come down marginally, and I don’t see it as being a profitable entity. There’s already much competition in their arena, and they need to seriously worry about Google,” said Scott Sweet, senior managing partner of

Google has already removed links to Yelp’s website, according to the filing, to promote its own products, and there is no reason to think that this will not happen in the future.

Google tried to purchase Yelp for close to $500 million in 2009, as did Yahoo!.

Yelp, like other Internet companies such as Google and Facebook, has not figured out how to monetize mobile just yet.

Several analysts have said that the mobile advertising space is still a few years away from advertisers really making a significant push into this market.

Yelp said it has not “materially monetized our mobile app to date,” and may not do so in the future if Google, Facebook, and others can’t figure it out.

At nearly $900 million, Yelp started trading at 10 times revenue.

Conversely, Google trades at six times trailing 12-month revenue and is highly profitable.

Even Groupon, which came under criticism for its accounting-methods and low barrier to entry, trades at six times trailing-12-month revenue.

“Yelp is selling at the highest multiple to sales to its competitors, which is a serious metric that has to be looked at,” Sweet said. “Yelp is selling at nearly double what Google is.”

Yelp was competing with Groupon in the “daily-deals” space, but left that market in 2011, along with Facebook, as revenue growth slowed.

Yelp priced its IPO Thursday night at $15 per share, above the expected $12 to $14 a share range, indicating the high interest in the offering. About seven million shares were sold in the offering, raising $107 million.

The shares opened for trade at $22 each, about 64 percent above the IPO price. Yelp shares gained 60 percent in first-day trading Friday.

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