Yelp leaps out from starting gate with strong IPO

By Jeremy C. Owens and Peter Delevett San Jose Mercury News

SAN JOSE, Calif. — San Francisco reviews website Yelp received five stars from investors in its stock market debut Friday, as shares of the company — goosed in part by enthusiasm for Facebook’s coming IPO — jumped 64 percent from their initial public offering price.

Yelp Inc. on Thursday sold institutional investors 7.1 million shares at $15 apiece, an amount that put at least $107 million in Yelp’s coffers, before expenses. The stock, trading with the ticker symbol YELP, opened on the New York Stock Exchange at $22 Friday morning.

It closed at $24.58 and was holding steady in after-hours trading. At that price, the company is worth $1.4 billion.

The company has a strong pedigree, with its founders part of what’s often called the PayPal Mafia — referring to alumni of PayPal who went on to start their own tech companies. Yelp.com has become a destination for consumer reviews of restaurants and other businesses and services, from plumbers to churches.

“We see a huge opportunity to become the strongest brand in local,” CEO and co-founder Jeremy Stoppelman told Bloomberg Television in an interview. “Whatever business you need to go to, we’re going to have the best content for that.”

But Yelp has never managed to turn a profit, and it could face serious competition from Facebook and Google as it seeks to survive on advertising. Also, other sites are encroaching on its main focus, with Google buying consumer-review service Zagat last year and Foursquare offering visitors’ reviews in its location-based check-in service.

Morningstar analyst Rick Summer, who pegged Yelp’s value at $9 a share in a pre-IPO report, said in an interview Friday that he was “shocked” at the stock’s rise, saying, “We have entered into a little bit of Crazytown, U.S.A.”

“There’s other ways for businesses to put their best foot forward with Groupon, LivingSocial, Foursquare, Google, Facebook and more,” he said. “It’s not clear that Yelp has a hold on that slice of the market.”

Yelp’s built-in advantage, boosters say, is the wealth of reviews on its site and its name recognition for crowd-sourced thoughts on businesses. The company said in its IPO filing with the Securities and Exchange Commission that it had 25 million reviews at the end of 2011, and its website attracted 66 million unique visitors every month.

Much like Groupon and the daily-deals sector, Yelp’s user-reviews site was an originator when it first appeared in 2004, founded by two former PayPal engineers: Russel Simmons, who left PayPal after it was acquired by eBay in 2002, and Stoppelman.

“Jeremy’s an extremely bright engineer but he also understands business needs,” said Eric Jackson, who worked with Stoppelman at PayPal and is now CEO of a Los Angeles startup called CapLinked. “That sense of what a product needs to accomplish is something that really set him apart.”

The two founders received guidance from PayPal co-founder Max Levchin, who is now chairman of the company, as well as venture capital investments from heavyweights such as Bessemer Venture Partners, Elevation Partners and Benchmark Capital Partners.

Neither the venture firms nor the founders sold stock in the IPO, according to the company’s regulatory filing. The Yelp Foundation will sell 50,000 shares for charitable causes, but the other 7.1 million shares that the company plans to sell will provide money for Yelp’s operations. The underwriters may sell up to 1.1 million more shares if demand calls for it.

Investors holding on to their shares and those buying in to the company Friday expect Yelp’s revenue growth to continue — the company reported 2011 revenue of $83.3 million, up 73 percent from the year before.

But Tim Ghriskey, chief investment officer of New York investment advisory firm Solaris Group, said Yelp’s soaring valuation “assumes a very high rate of growth. I’m concerned about the stock at this price.”

Ghriskey gave Yelp credit as a “first mover” in the social reviews space and noted the company’s loyal customer base. But he thinks the biggest factor behind the stock’s rise may be the Facebook effect.

“You have the imminent IPO of Facebook sitting out there, and there’s a rub-off effect,” he said. “Given the valuation that Facebook is likely to come at, it sort of justifies the valuations of other Internet names.”

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(c)2012 the San Jose Mercury News (San Jose, Calif.)

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