Shares of online review website Yelp jumped 65 percent after their initial stock market reveal, posting at nearly $25 in early Friday trading. Demand for the online review company is strong, despite the company’s inability to turn a profit in the eight years that it has been operational.
After expenses, Yelp (News - Alert) estimates that they will retain an estimated $96 million after the expenses of their IPO. In all, Yelp sold 7.1 million shares of its common stock and its charitable foundation sold another 50,000. Investment bankers can sell an additional 1.07 million shares if investors demand them, which would bring Yelp’s cash infusion up to $111.2 million. The stock price gives Yelp a value of $1.49 billion, up from the $900 million price tag (News - Alert) estimated at its IPO.
Yelp hopes that going public will help it to become profitable. The company booked a loss of $16.7 million in 2011. “Yelp's active community of users writing reviews of local businesses is difficult to replicate,” Morningstar analyst Rick Summer told the Associated Press (News - Alert). “Unfortunately, the company faces challenges translating the small advertising budgets of local businesses into profitability, as about 70 percent of ad revenues are eaten up by sales and marketing expenses.”
Despite Yelp’s less-than-stellar financials, many are linking the success of its IPO to Facebook, and analysts are hoping that similar Internet companies making their IPOs this year will have a high level of success. One of Yelp’s advantages over specialized review websites like Angie’s List is that Yelp does not focus on a single sector. For instance, although about 42 percent of its reviews are of dining establishments, the website also allows users to review churches, salons and other types of businesses.
At the same time, merchant advertising is not likely to fuel long-term growth. Analysts say that Yelp needs to find a new growth strategy. “Sites like Yelp need to deal with a fundamental question: Who is the primary constituency? Is it the users, reviewers, or the merchants?” Mitch Rothschild, CEO of doctor review site Vitals, told Forbes. “The challenge with businesses like Yelp is that the users don't pay the company – but the company needs their loyalty. So how big Yelp gets will depend on whether it can iterate new revenue streams.”
Currently, Yelp receives about 66 million unique monthly visitors and boasts 25 million reviews on its site. It operates in 46 U.S. markets and 25 international markets with both a traditional website and a popular mobile app.
Edited by Jennifer Russell