Crowd-sourced rating service Yelp is wowing the investment community on its first day as a publicly traded company.
Before Friday’s initial public offering (IPO), analysts estimated it would fetch between $12 to $14 a share. However, trading in Yelp stock opened at $22 and as of midafternoon Friday, it was trading at $24.72, some 60 percent above its opening price and virtually double the consensus estimates.
Why is Yelp doing this well? Its restaurant, shopping, and night-life reviews are popular, growing, and influential. It comes in ahead of the most anticipated IPO in years, Facebook’s, which some believe will wind up being the biggest in history. There is still money to be made in high-tech IPOs.
But the more important question is: Can Yelp sustain its unexpected surge?
Tech IPOs in the past six months have proved disappointing, occasionally awful. Of the 33 high-tech IPOs launched in the past 12 months, only 14 are now above the closing price of their first day of trading, according to IPO Scoop.com.
For example: Groupon, the group coupon website, closed above $26 a share on its first day but now sits below its original asking price of $20.
Yelp gets its revenue from advertising, mostly from the local businesses its users review. Last year saw about $83 million from ads, up almost 75 percent from 2010. But it has yet to make a profit and that fact is hardly a confidence builder. Last month, blogger Simit Patel on investing website Seeking Alpha headlined his take on the company: “Yelp: Another Overvalued IPO from Bubble 2.0.”
Will Yelp keep its lead and build on it? Stranger things have happened, of course. But if the last year of technology IPOs is any indication, the odds are not in its favor.