Yelp Files S-1 In Plans To Go IPO

Yelp filed its S-1 form with the SEC this week in its plan for initial public offering. Here I comb through the filing and highlight items of interest.

Reviews, Reviews and More Reviews

Yelp is a review site with a database of over 22 million customer reviews with each broken down into these ten groups:

• 23% Shopping
• 23% Restaurant
• 10% Home and local service
• 9% Beauty and fitness
• 8% Arts, Entertainment and events
• 5% Health
• 4% Auto
• 4% Nightlife
• 4% Travel and hotel
• 10% Other

The number of customer reviews has soared from last year to 66%. Also, the number of unique visitors has also grown 63% from the prior year. These are very good growth numbers. However, Yelp in their S-1 cautioned that investors should not expect these kind of sharp growth figures to continue.

Financials

For first nine months to September 30, 2011

• 60 million unique visitors a month
• 5 million unique mobile device visits a month
• Revenue comes from advertising on approximately 19,000 local businesses
• $58.4 million in revenue
• Loss of $7.6 million

Yet another company operating at a loss and going IPO. However, $7.6 million over 9 months isn't so bad.

Strategy

Yelp plans on using proceeds from IPO to generate more reviews, users, and sales to local businesses. They want to reach out to international markets and increase sales force.

Growth metric is based on the definition of a Yelp Market which consists of a Community Manager assigned to a city or region. Each market's metric is based on:

• Number of reviews
• Advertising revenue
• %change in reviews
• %change in advertising revenue

Risks In Business Factors

Yelp cautioned investors with the following:

• Short operating history
• Have experienced operating losses
• Relies on search engine traffic from Google, Yahoo, and Bing
• 50% of search engine traffic comes from Google
• Yelp competes with Google Local
• Users may not value quality of reviews
• Relies on brand recognition
• Can fail to increase local advertiser base

The thing I'd be concerned with here is that half of their traffic is driven by Google. If Yelp loses search engine position in the major keywords they use, that would put a big damper on business. Local advertisers will have no reason to list and customer reviews will decline. In addition, social networking sites like Google+ and Facebook have local recommendation services that could gain traction. The risk I'd say is above average.

Revenues, Expenses, and Earning Charts

From the data provided in the S-1, I put together these charts.

Revenues are soaring...

So are expenses...

But they are not profitable...

Why? High overhead sales and marketing expenses (58% of costs at $38.5 million)

IPO Underwriting

Goldman Sachs will be the lead underwriter for Yelp which virtually guarantees success right out of the gate on the first tick. But only if you are a customer of any of the underwriters below, good luck - your buy in the open market is someone else's overvalued shares.

Role	Company
Lead underwriter	Goldman Sachs
Underwriter	Jefferies
Underwriter	Citigroup
Underwriter	Allen
Underwriter	Oppenheimer

Stock Structure

Type	Shares
Series A	40,000,000
Series B	44,802,000
Series C	32,288,630
Series D	14,531,460
Series E	11,644,155
Total	143,266,245
Options outstanding	38,855,506
Options available for future grants	3,776,221
Total	185,897,972

Competition

Yelp is an Internet advertising company. So is AOL, Yahoo, and Angie's list. Lets look at a comparison:

Company	Revs	Income	MktCap	Price
Yahoo	$5,190,000,000	$1,070,000,000	$19,000,000,000	$594.88
AOL	$2,220,000,000	$54,900,000	$1,430,000,000	$14.73
Facebook	N/A	N/A	$50,000,000,000	N/A
Angie	$78,000,000	-$51,000,000	$413,000,000	$15.80
Yelp	$77,000,000	-$10,000,000	N/A	N/A

Note: Facebook valuation based on Goldman Sachs investment on January 2011. Yelp revenue and income based on average of previous 9 months plus average of additional quarter to annualize results.

Estimated Market Capitalization

Based on 143,266,245 shares outstanding on Series A-E:

Share price	Mkt Cap
$4.00	$573,064,980
$6.00	$859,597,470
$8.00	$1,146,129,960
$10.00	$1,432,662,450
$12.00	$1,719,194,940
$15.00	$2,148,993,675
$18.00	$2,578,792,410
$20.00	$2,865,324,900

So What's A Fair Price?

Total authorized shares are 185 million. Outstanding at 143,267,115. Based on outstanding, Yelp likely goes out at $8/share with a $1.1B given the craziness of market valuation. I wouldn't consider it unless it came down to $4.

Dot Com Bubble All Over Again?

You know, it puzzles me why companies that make no money can go on the US stock exchange to be listed.

In June, Pandora (P), the online radio portal, went public at $16.00/share putting on a $2.5 billion market cap on approximately $200 million (ttm) in revenue. However, the company's net income stands at a $18 million dollar loss (ttm). Pandora managed to raise $235 million.

Renren (RENN), the Chinese social network site, went public in May at $14.00/share giving it a $5 billion market cap on a present revenue ttm of $83 million. Current net income is -$65 million (ttm). They managed to raise $740 million for their offering.

Then we have Groupon, the social coupon website who raised $700 million pricing shares at $20/share. That put it at $12.7 billion market capitalization on revenues of $1.2 billion (ttm) and net income at -$686 million (ttm).

This week, Angie's List (ANGI), shot out of the gates and was worth nearly $900 million dollars in market capitalization. The company has been operating in the red with a $42 million dollar loss on nearly $59 million in sales as of the 9 months into September 30, 2011. Yet, they managed to raise about $115 million for their offering.

There is a disconnect. Companies that make no profit are being valued at ridiculous levels. Early investors in said companies bail their shares at handsome profits. Underwriters find the buyers for a first day pop. Buyers sell into it and the stock falls back to reality. But it doesn't matter for early investors. They still come out with huge percentage gains after the lockup period.

And you wonder why people are revolting out in the streets of America in the Occupy Wall Street movement.