Yelp IPO's Profit Enigma: Is the Site Making Money?After reading the breathless coverage in The Wall Street Journal, Bloomberg News, and The New York Times about the rumored $2 billion Yelp IPO, I have one question: Does the online-review site make money? None of the media reports made any mention.
In the new rush to bring high-flying tech companies public, profitability has become lost in the shuffle. The media chooses not to focus on it because the people who leak these stories chose not to discuss it. But it's the issue that should be first on investors' minds.
The Yelp IPO stories have all the hallmarks of a carefully crafted public-relations campaign. It's all anonymously sourced because the leakers -- the bankers, companies, and their PR people -- want to cover their tracks. The de facto "no comments" should not fool anyone. For one thing, the reports mentioned that Yelp was going to hire Goldman Sachs (GS) and Citigroup (C) to handle the public offering. To underscore the "hotness" of the deal, an anonymously sourced tidbit mentioned that Yelp rebuffed a $500 million takeover offer from Google (GOOG) about two years ago. Furthermore, the stories pointed out that Yelp's latest round of financing in January 2010 valued the company at $500 million. This raises a red flag.
The leakers of the story may have had good reason not to mention whether Yelp is making money: It could be losing money or, at best, be marginally profitable. The Journal mentioned that Next Up Research estimated that Yelp would earn $100 million in revenue in 2012, but there was no discussion of the basis of the forecast, nor any mention of what the company expects for 2011.
Yelp, though, is hardly unique. Many other hot IPOs have weak balance sheets and are getting premium valuations.
Rival Angie's List, which recently filed to go public, said in its S-1 filing with the Securities and Exchange Commission that it had an accumulated deficit of $143.2 million as of this past June 30. The IPO would value the Indianapolis-based company at as much as $114.3 million in its initial public offering.
LinkedIn (LNKD), the business social network, recently reported second-quarter net income of $4.5 million, or 4 cents a share, on revenue of $120 million. Even that small profit was a pleasant surprise for Wall Street analysts, who had expected a loss. Groupon (GRPN), which recently had the biggest IPO since Google, incurred net losses of $389.6 million and $102.7 million in 2010 and the first quarter of 2011, respectively, according to its S-1 filing with the SEC. Its accumulated deficit was $522.1 million as of March 31.
Yelp offers a great service, but it's not one that's terribly difficult to duplicate. Competition for the local advertising dollar will only intensify. As Bloomberg noted, the company has scaled back its foray into the daily-deals business after realizing that it couldn't compete against Groupon.
Until its path to profitability is certain, investors should avoid Yelp's stock.
Jonathan Berr owns no shares of the aforementioned stocks. Follow him on Twitter, where he goes by @jdberr.

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This is why Yelp is going public they need more money to pay for their expenses. They're not getting it from business owners. More borrowed money, borrowed time.

November 21 2011 at 3:37 AM Report abuse rate up rate down Reply

The wall street journal reported 3 days ago, Yelp had a net loss of $9.6 million last year, and a loss of $7.6 million for the first nine months of this year, the filing said. It said the company had an accumulated deficit of roughly $32.1 million as of Sept. 30.

Revenue for the first nine months of 2011 rose to $58.4 million, Yelp said, up sharply from $32.5 million a year earlier. That appears on track to fall short of some analysts' expectations. Greencrest Capital, for example, has forecast Yelp's 2011 revenue at $117.6 million.

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November 21 2011 at 3:34 AM Report abuse rate up rate down Reply
No Victim

I would not touch this one with a ten foot pole. YELP is a known extortion scheme whereby businesses who decline to advertise wind up with their positive reviews filtered and their negative reviews made prominent. A cadre of so called elite Yelpers, are essentially losers, Yelps hired guns who do the dirty work of defaming small businesses for them. If you look at the numbers for this IPO they simply do not add up. After all, how can YELP expect small businesses to advertise with a bulletin board which has already defamed them or threatens to do so? Keep in mind that this money losing business relies on advertising for over 60% of its revenue!
To make matters even worse there are numerous class action lawsuits which have already been filed, one of which has been dismissed WITH PREJUDICE but there are many, many others in the works.

November 17 2011 at 11:00 PM Report abuse rate up rate down Reply

A much more important question: Is Yelp making money LEGALLY? Just read the reviews of Yelp Inc. on Yelp itself , and on Google Places and CitySearch and other review sites - literally thousands of cases of extortion and shakedown of small business owners. Where there is that much smoke, at minimum there must be a lot of expensive litigation and regulatory action coming, never mind a lot of bad karma for anyone who supports a business model this corrupt.

November 13 2011 at 3:21 PM Report abuse rate up rate down Reply

I own a business here in Ca for 20 years. We have a extremely positive reputation with the community we serve. We had 12 Yelp reviews from our customers 1 one star rating do to circumstances beyond our control. 1 with three stars and the rest with 5 stars ratings. At this point all reviews were un-filtered for the readers to see.
Recently I got a call from there advertising department wanting me to advertise on yelp. I declined there offer which after approximately 20 days all 5 star ratings went into the filtered category.

You can say this was an obvious move on there part to damage the reputation of this business.

November 11 2011 at 1:32 PM Report abuse rate up rate down Reply
Hi, Ed!

YELP extorts money from local business..I would not invest one penny in the company.

November 11 2011 at 12:13 PM Report abuse rate up rate down Reply