The Yelp IPO: Another Tech Bubble?

Maybe it’s just me, but when you have a history of trading tech funds in the late 1990s and then helped create mortgage-backed securities in the mid 2000s, you tend to side with caution when something seems a little off.

Now, I know there’s a lot of hoopla around the Facebook IPO these days, but go ahead and call me crazy if I don’t want to pay 100 times more for a stock than its valuation.

I also believe that the Facebook buzz has trickled down to other companies in the tech industry to give them a little bounce. The perfect example of this phenomena is probably Yelp.

Yelp’s Landscape Before its IPO

Yelp Inc. (NYSE: YELP) provides information through an online community offering social networking. The company and its users gather to share user reviews, events, and special offers in certain locations and categories. Yelp covers restaurants, shopping, nightlife, financial services, health and a variety of others services.

Before last week’s IPO, here’s where they stood:

• Revenue rose 74% to $83.3 million last year, with local ads accounting for 70% of that and brand advertising making up most of the rest.
• The company hasn’t posted a profit since at least 2007.
• The IPO is set to raise as much as $100 million, which would value Yelp at about $838 million – somewhere around the $12-to-$14-per-share range.
• Yahoo! (Nasdaq: YHOO) already operates a local page that includes reviews in categories also covered by Yelp.
• Google (Nasdaq: GOOG) aims to boost its local appeal with its 2011 purchase of Zagat Survey LLC, the publisher of the burgundy restaurant guides.
• Facebook also poses a threat with more small- and medium- sized businesses setting up fan pages and buying ads to promote themselves on the social-networking site.

What you seem to have here is a company that’s never shown a profit, based on an ad-driven business model, with three industry heavy-hitters intent on infringing on their market share.

On top of all that, your IPO will put you at an expected value of up to 10 times annual sales. There may be some great ideas and energy going on at Yelp, but that’s asking for a true leap of faith to buy right now.

Surprised, But Not Surprised

Yelp’s stock closed 64% higher at $24.58, a day after Yelp priced its IPO at $15 a share – above its indicated range. At Friday’s closing price, the company is worth about $1.47 billion – about 17 times its 2011 revenue.

Go figure… But this should’ve been expected.

Seeking Alpha’s Brian Nichols, who in the last few months has written articles on Yelp and Groupon (Nasdaq: GRPN), has followed nearly all of the high profile internet-based company IPOs over the last year. And except for Zynga (Nasdaq: ZNGA) – which sunk at the beginning – they all follow a very distinct pattern.

They all traded significantly higher at open, but then followed a downward trend. And this is where it gets interesting. Each and every stock that follows this trend reverses to post gains near 50% in a short period of time.

Company	Ticker	% Fall	% Rise
Renren	(NYSE: RENN)	70%	73%
Linkedin	(NYSE: LNKD)	50%	75%
Pandora	(NYSE: P)	50%	50%
Zillow	(Nasdaq: Z)	60%	55%
Angie’s List	(Nasdaq: ANGI)	40%	44%

Groupon latter followed suit with a 50% fall from its high – only to see it rise 54% from that low in early December 2011.

Will Yelp Figure in to This Trend?

That remains to be seen. Nichols is the first to admit that there’s no rhyme or reason for this “trend.” You can speculate that some buy in at the beginning just for high initial gains. After a sell-off, you may just have the “true believers” in technology buying in at low prices.

Either way you look at, Yelp could be heading for big losses soon and then a comeback. But this whole idea of buying ideas, not fundamental valuations, looks eerily similar to any company coming out in the late 1990s with “.com” behind their names.

Good Investing,

Jason Jenkins

Article by Investment U