Groupon, Inc. (MM) (NASDAQ:GRPN)
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2 Years : From Dec 2011 to Dec 2013
It's likely that investors will see a first-day rise in Yelp Inc.'s shares during its IPO next week, but the ability of the online review site to hold on to those debut gains is debatable.
With 66 million monthly unique visitors, 25 million business reviews, a popular mobile application and an international reach, Yelp is a recognizable brand that has generated strong revenue growth off increased online advertising. As a result, analysts believe the stock should rise when it begins trading March 2 on the New York Stock Exchange under the symbol YELP.
What happens in the weeks beyond is less certain. If past IPO performances by such unprofitable social media companies as Groupon Inc. (GRPN) and Angie's List Inc. (ANGI) are any indicator, after that initial pop, some of the fizz may go out of the stock, which is meant to raise $100 million.
Groupon rose nearly 31% on its first day of trading in November, but is currently trading below its IPO price. Angie's List, a subscriber-only business review site that went public that same month, is above its IPO price but below its first-day gain of 25%.
"Yelp will probably do well early on, but then I see it drifting back down," said Scott Sweet, managing director of research site IPOBoutique.com. "It will likely sell off in a similar fashion to the others that preceded it."
There's no doubt that Yelp has the kind of revenue growth that investors love; in 2011, total net revenue increased 74% to $83 million as more businesses purchased advertising plans, compared to 2010. The question for it and businesses like Groupon is whether their models can become profitable, given their high cost of sales and marketing. Although the proportion of money that Yelp spent on sales and marketing, as a percentage of net revenue, has declined, it remains unprofitable.
Also a concern is the fact that Yelp could be nudged out by larger companies-such as Google Inc. (GOOG)--with their featuring their own consumer reviews. Google, which accounted for more than half of Yelp's traffic in 2011, has removed links to Yelp from portions of its search engine, and promoted its own competing products in search results, Yelp warns in its prospectus.
That should be a red flag for potential investors, along with the company's rate of revenue growth slowing on a quarterly basis, said Francis Gaskins, president of research site IPOdesktop.com,
Gaskins, who had referenced one of the more prominent dot-com flops when he described Groupon as "today's Webvan" ahead of its IPO, is less caustic in his assessment of Yelp. He praised the company's large user base and expansion globally, and said given the good performance of two IPOs this week, Proto Labs Inc. (PRLB) and Bazaarvoice Inc. (BV), he expects investors will be enthusiastic about Yelp, too.
"Yelp will pop. But they do have other issues" that could weigh on the stock longer term, he said.
-By Lynn Cowan; 301-270-0323; firstname.lastname@example.org