Why Investors Love Yelp Even As They Hate Other Social Stocks

Image representing Yelp as depicted in CrunchBase

Image via CrunchBase

From my Forbes.com blog The New Persuaders:

Unlike those other two little social media companies whose disappointing second-quarter reports last week knocked their shares to all-time lows, Yelp today wowed investors with better-than-expected second-quarter earnings and outlook for the rest of the year. After falling almost 6% today to $18.82, shares in the local business reviews site have rocketed up in after-hours trading by 14%.

Needless to say, a good quarter and outlook both help, but there’s more behind investors’ enthusiasm about Yelp versus Facebook and Zynga. They perceive some key positive fundamentals, too:

* Reviews of local businesses present a clear, understandable opportunity for advertising, and local advertising is a nut that no one online has yet cracked the way the Yellow Pages did in phone books. Yelp’s reviews provide a prime place for this advertising to appear. Local advertising rose 89% in the quarter. Meantime, fairly or not, both investors and advertisers still aren’t sure about Facebook’s and Zynga’s business models.

* Yelp has network effects in its favor, since the more reviews it gets (up 54% from a year ago, to 30 million), the more businesses are likely to create Yelp pages and advertise, in a self-reinforcing cycle. Active local business accounts rose 113% from a year ago, to 32,000. …

Read the complete post at The New Persuaders.

One Response

  1. Not a fan of Yelp’s business model. Review quality is hampered by two main factors: negative selection bias, Yelp’s questionable filtering systems. Way overvalued. Positive investor sentiment won’t last forever. http://palumbopicks.wordpress.com/

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