Should investors party like it's 1999? Let's not: Whatever happened to Pets.com, again? The recent onslaught of social media IPOs making a conga line into the public market simply screams, "Buyer, beware!" Although I've rated quite a few newly public social media stocks with underperform calls in CAPS already, I'm adding Yelp (NAS: YELP) to the gang, with another red thumb CAPScall.

History showed us that only a few young Internet companies survived that bubbly era when any stock with a ".com" in its name sounded like a great idea to investors. Fast-forward to today, and we're seeing anything to do with social media going public. Are some investors thinking they'll find the next Amazon.com (NAS: AMZN) ?

The search for social growth
In my opinion, there are plenty of reasons to avoid the coming Facebook IPO, but Yelp looks even less appealing. First off, this isn't a profitable company. While Yelp's revenue line grew about 75% to $83 million last year, its annual loss widened, too, to $1.10 per share from $0.71 per share.

In its IPO prospectus, Yelp discloses that despite its rapid revenue growth over the past several years, sales are expected to slow in the future due to factors like maturation of its business and the decline of major geographic markets it can tackle, particularly in the U.S. In other words, don't expect infinite levels of the top line growing like gangbusters. In fact, the company's already entered many of the largest U.S. markets.

Yelp relies heavily on search results through Google (NAS: GOOG) , Yahoo!, and Microsoft's (NAS: MSFT) Bing, and part of its success hinges on prominent placement in unpaid local business search results. Another risk: Google is Yelp's most significant source of traffic, representing more than half of all visits last year; that's hardly surprising, given search rivals' failures at denting Google's dominance. (Bing recently made a teensy gain in search, while Yahoo! fell further behind, but as of February, Google represented 66.4% of search share, according to comScore.)

Google's dominance has its dark side, too. Yelp accuses Google of having removed links to its website from its search results and promoting its own local products.

Regardless of whether Google's the good guy or bad guy when it comes to the long-term well-being of Yelp's business, the topic segues perfectly into a major risk: Consumer-driven reviews of businesses for Web-savvy searchers aren't exactly in short supply.

Angie's List (NAS: ANGI) immediately springs to mind as a major competitor. Although I already put an underperform rating on Angie's List in CAPS, here's one thing Angie's List has that Yelp lacks: a source of revenue other than ads. Angie's List charges a subscription fee for its services. One could argue that Angie's List's decision to charge will hold memberships back, but the fact that last year Yelp relied almost entirely on advertising for revenue is also a dangerous game to play. (That lesson was painfully doled out in the dot-com bust, in fact.)

When it comes to consumer-driven reviews and opinions, Facebook and Twitter, arguably the kings of social media, can serve the same purpose, really. Consumer outrage that goes viral or high volume has not only caught public attention through these media, but such incidents have also caused some companies -- including very large ones -- to change course here lately. That's great, but I'd also call it a "bad review" for services like Yelp.

Social butterfly, or socially inept?
Yelp's IPO prospectus starts off with a fun graphic trumpeting user reviews of Yelp that sound more aspirational than convincing. "Do you remember life before YELP? I sure don't." That's a nice sentiment, but I think it gets ahead of reality for most of us. Obviously somebody feels that way, but I, for one, sure do remember life before Yelp; in fact my current life is pretty much Yelp-free.

Amazon grew and evolved from what seemed simple yet disruptive at the time (selling books and music on the Internet) to what it is today, selling everything your heart desires and then some. After all, it also boasts digital domination plans and now, it's even getting into robots.  

The true Amazonian survivalists of the dot-com bubble were few, though; there were far more failures complete with destruction of shareholder capital. Pets.com, eToys, Webvan...the graveyard is full of 'em, but they all probably "sounded like good ideas at the time."

I'm putting a red thumb, "underperform" rating on Yelp in CAPS; I don't think it's a good bargain for investors, and it may not even make it through any survival of the fittest phase in social media stocks. You can track my record here.

While tech stocks often times try to break the rules, stocks in any sector can shatter the status quo, and The Motley Fool thinks it's found just such a case. If you're looking for amazing growth, check out our analysts' report "Discover the Next Rule-Breaking Multibagger." Better yet, we made it free for our readers, so click here to access your copy now.

At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Amazon.com, Google, Yahoo!, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Microsoft, Google, and Yahoo!. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Lori

Yelp has been charged with extortion in the placement of the order of reviews if the business reviewed does not buy advertising. That would not surprise me. But it is even more insidious than that. The problem is that the chronic "yelpers" will be kept on the review even years later even though the person that they take issue with does not work for me. On the other hand, the occasional positive review gets thrown out because people who do not chronically complain tend to post less often. I am in a quandary whether to ask my customers to post, and in effect advertise for the hated company, or just do the best I can by responding to the negative posts.

March 21 2012 at 10:35 PM Report abuse rate up rate down Reply
wolfpax

I can't see myself taking the advice of this writer too seriously: after reading this I know ALL the reasons it would be folly to invest in 'Yelp'...but I still have no idea what it does. Basically it leaves me wondering who is paying the writer to post this.

PAX

March 21 2012 at 12:05 PM Report abuse rate up rate down Reply