Yelp shares soar 60% after IPO – five reasons why investors are crazy about the social review site

Reviews platform Yelp hit the Nasdaq stock exchange in the US with a bang late last week, with its shares surging as much as 60% after opening in what has become one of the most successful tech listings in recent history.

Yelp finally listed last Friday in the US, opening with its shares at $US22 each. Soon after, its shares rose 60%, before closing at $US24.52. The company offered 7.15 million shares, in the hope of raising just over $US100 million.

The company is now valued at $US1.3 billion.

The business itself isn’t the only winner. Founder and chief executive Jeremy Stoppelman saw his 11% stake valued at $US150 million. Other investors, including former Apple chief financial officer Fred Anderson, Benchmark Capital partner Peter Fenten and former PayPal chief technology officer Max Levchin all saw their stakes rise in the hundreds of millions of dollars.

Yelp’s debut was more successful than most other tech companies over the past year, including Groupon and Pandora, indicating investors are viewing these companies individually rather than as a whole.

But, like these other companies, it is also yet to be profitable. Yelp had a $US17 million loss last year – up from $US9.5 million in 2010.

So why are investors going crazy over Yelp when, like these other tech companies that came before it, the business is yet to make money?

Higher barriers to entry

Yelp has something that only seven years of work can provide – a critical mass of reviews. The company is built on the idea that people share reviews on everything – from small businesses to large ones. As a result, there are millions of reviews for hundreds of thousands of businesses; something a competitor can’t create out of thin air.

“To start a consumer review site and then build the scale that’s needed for it to be successful is difficult,” says Telsyte research director Foad Fadaghi. “This has been reflected in the share price.”

Strong mobile presence

More everyday transactions and searches are being conducted on mobiles now, mandating the creation of mobile-friendly websites. A service like Yelp that can be easily searched on a mobile is a perfect fit.

As Fadaghi explains, Yelp began before smartphones became popular, making the business seem all the more attractive. “The mobile aspect is a multiplier of its attractiveness,” he says.

Thousands of potential advertisers

Yelp has a massive platform to help small businesses advertise – perhaps a bigger platform than even Groupon or other group buying sites. Already it’s helped many small businesses do deals and discounts, and virtually any company that’s represented could potentially crack a deal.

The advertising potential here is massive. The company’s potential to earn revenue from some sort of future activity with these businesses is strong, over and above its existing advertising programs.

The trend towards research

There has been a clear shift towards websites that help people research before they buy – especially in fiscally conservative times. Anything to do with giving more information in a quality format is now valued at a premium, and Yelp has based its model on this.

“That kind of assistance is valued overall higher than a service from what you’d get in a streaming music company, which is competing a low-margin area,” Fadaghi says.

Strong branding

There are all sorts of theories about online reviews and why many of them can’t bet trusted. But the fact Yelp recognises this problem – and tries to address it – is part of the reason why it’s become so successful.

Yelp uses writers who have proven to be trustworthy, and highlight them on the site. Whenever one of these premium reviewers writes something, Yelp is developing trust – something that can only be gained over years of reviews and exposure.

Just like a Google, or a Facebook, Yelp is the biggest site of its kind and it’s reached a critical mass that will be hard to topple.