The king of online local restaurant reviews, Yelp, went public this morning.Its stock is now trading at $25 a share, ~70 per cent above the price institutional investors paid for it last night.
That gives the company a valuation of ~$1.5 billion.
So, we have a simple question for the people scarfing up Yelp at $25 a share:
What on earth are you thinking?
We don’t mean to be rude. We’re actually curious.
Because here’s what we see when we look at Yelp:
- A cool company that we like and use
- A business with $80 million of revenue that is losing a boatload of money
- A business that is growing about 40–50 per cent a year—a snail’s pace relative to other hot online companies like Groupon, LinkedIn, and so forth
- A business that will have a tough time generating meaningful profits on account of the enormous number of local salespeople required to sell its ads
At $25, Yelp is currently trading at almost 20X last year’s revenue.
That is a huge revenue multiple for a company with Yelp’s growth rate and likely future profit margin.
Digital media companies like Yelp generally trade in a range of 3X-8X revenue, sometimes hitting 10X for really hot properties. And that’s for profitable digital media companies, not companies that are hemorrhaging money.
We realise that investors are starved for growth stories. But wouldn’t they prefer to wait for an opportunity to buy these growth stories at a cheaper price? Look what happened to Groupon’s stock after the IPO. Look what happened to Demand Media (Yelp’s a much better business than Demand Media, but investors were initially pretty jazzed about Demand Media, too. Then they woke up).
So, at this price, what Yelp investors appear to be thinking is:
- Yelp’s growth will accelerate massively
- Yelp will figure out a way to coin money
And that’s cool. We admire people who think different. And anything’s possible.
But we’d be grateful if someone who is buying Yelp at $25 could explain why they think it’s worth that.
Because otherwise we’re just going to conclude that you’re all nuts.