Tough Reviews for the Yelp Inc. (NYSE: YELP) IPO

Four months ago, when Groupon (NasdaqGS: GRPN) went public, Investing Daily editor Jim Fink wrote that even though the company’s revenues were soaring:

“Operating costs are also growing fast, and the company’s total costs are greater than its total revenues. The more Groupon grows, the more money it loses. It reminds me of the old joke: ‘what I lose on each sale I will make up in volume!’”

Fink’s words resonated again on Friday, when Yelp Inc. (NYSE: YELP), a website that helps users seek out and review restaurants and other businesses, made its stock market debut. Like Groupon, Yelp Inc. shares popped on their first day of trading, shooting up 64%, from the IPO price of $15 to $24.58. (They have since pulled back to around $21.)

Cheerleader Analysts Applaud the Yelp Inc. IPO—but Where Are the Profits?

“It fits into a lot of trends,” said Renaissance Capital analyst Nick Einhorn of Yelp’s big jump. “It’s the type of social web and local business advertising that investors are interested in.”

Of course, trends are important in investing. But so are profits. And, like Groupon, Yelp Inc. has yet to turn any. In fact, its losses have been widening in the past few years.

Einhorn attributes that to the high cost of expanding overseas, pointing out that the company’s U.S. operations are profitable, but in 2011 “there were $7 million in costs related to international expansion without any accompanying revenue.”

The numbers, however, seem to point to more fundamental reasons for the ongoing losses at Yelp Inc. In an article entitled “Investors May Cry for Yelp After IPO,” Charles Ciaccia of TheStreet.com provided the bleak figures in an assessment that read much like Fink’s analysis of Groupon four months ago:

“According to its S-1 filing, Yelp’s losses increased faster than revenue grew. Yelp lost $2.34 million in 2009, but it lost $16.9 million in 2011. The company has not turned a profit in the eight years since it was founded, which can be troublesome to investors in an uncertain market.”

Yelp Inc. May Need to Rethink Its Entire Business Model

Ciaccia also raised concerns about Yelp’s heavy reliance on Google (NasdaqGS: GOOG) for its website traffic, a situation that could change if the Internet search giant decides to favour its own restaurant-review service, Zagat.com, over Yelp.

MarketWatch.com’s John C. Dvorak added other issues, including some problems within Yelp’s website, that could be holding back its profits. He writes:

“There are few ads, and the model is to get restaurants and shops to pay for higher placement within the reviews themselves—in other words, push the five-star reviews to the top. This is not an effective business model. It seems to irk users, for starters, and subverts the site’s power.”

Dvorak is not entirely pessimistic, however, writing that Yelp Inc. “can become a money machine. But not with the current narrow thinking.”

Yelp Inc. Looks Set to Follow the Familiar Social Media IPO Pattern

Another bit of history that’s getting lost in the social media hype is the poor performance that many of these stocks have turned in following their IPOs.

LinkedIn (NYSE: LNKD), for example is down nearly 30% from the stratospheric height of $122.70 it hit during its first day of trading, and Groupon has sunk over 41%.

Investors who fail to pay attention to that track record stand a good chance of finding themselves in the same situation with Yelp.