Yelp has priced its initial public offering at $15 a share, slightly above the expected range of $12 to $14. The consumer reviews site will raise more than $107 million in the offering, at a $898.1 million valuation. The company is set to begin trading on the New York Stock Exchange tomorrow morning under the ticker symbol ‘YELP.’
Investors will likely see a quick bump in Yelp’s share price tomorrow, similar to the surge that sent Groupon’s stock up 31% in its first day of trading. Though Yelp’s SEC-sanctioned “quiet period” has seen less criticism than its daily deal counterpart, many analysts remain unconvinced that Yelp’s model can continue the rapid growth achieved over the past few years.
Like many technology companies at their IPO, Yelp is far from profitable. What concerns many critics is less the company’s lack of profitability and more the direction in which its losses are heading. According to the amended S-1 that the company submitted to the SEC last week, Yelp’s net losses doubled in 2011, increasing to $16.86 Million from 9.74 Million a year earlier.
The losses are in part due to a spike in spending following a $25 million Series E round raised by the company in January of 2010 in a push to increase revenue as it approached an IPO. And Yelp did see dramatic growth — revenue jumped 74%, driven largely by its local ad stream.
A troubling sign for Yelp is that its sales and marketing budget, which for most local plays is primarily consumed in pushing SMB sales, has outpaced local advertising revenue in the last three years. Sales and marketing spending as a proportion of local ad revenue increased from 89 percent in 2009 to 93 percent in 2011.
This is not to say that the ratio will keep up. Much of the cost in scaling a local business is incurred in the early days when the company is entering new markets. Yelp has tripled the number of markets on its roster since 2009, and as the company builds a critical mass of reviews and merchant relationships in these geographies, sales and marketing costs will subside. That’s the thought, at least.
As it stands however, Yelp’s local ad model is poorly positioned to deliver the kind of sustained revenue generation expected as its presence in markets matures. As Rocky Agrawal pointed out in Venture Beat, Yelp’s pricing plan for local businesses is well beyond what advertisers are used to paying for even the most premium-targeted advertising. Yes, Yelp sits deep in the purchase funnel and thus, is well positioned to drive consumers to businesses, but without deeper integration into the point of sale, the company will never be able to serve up the raw data that local businesses are increasingly coming to expect.
In many ways, Yelp’s future is tied to long-term strategic decisions at Google. The search engine drives over half of Yelp 60 million unique visitors and a substantive change in the algorithm — say to favor Google Local’s business pages and reviews — would be devastating to the company’s consumer traffic. The New York Times Company saw revenues at its cash cow About.com evaporate in a matter of months following Google’s Panda update, with profits dropping by 67% and revenues declining by a quarter.
Earlier this week, Google released a substantial update to its local search product Venice that should concern potential Yelp investors. Local Universal results — the listings results that Google displays next to a map for local searches — have been given a big bump, pushing Yelp results farther down the pages. Local Universal results not only include basic business information but include a link to Google Reviews.
Though the Venice update is not a back-breaker for Yelp, it shows Google has no intention of changing competitive course, even in the wake of a series of congressional hearings over anti-trust concerns. The next six to eight months should largely be about building innovative advertising products, and a stand off with Google over customer acquisition could stymie Yelp’s its progress.
Steven Jacobs is an associate editor at Street Fight.