Yelp Gets Reviewed - Costs And Income Fail To Justify The Price

As the quiet period came to an end for recent IPO Yelp (YELP), star analysts released their opening stances for the social review site on Wednesday. What could be clearly seen as the opening review of Yelp was surprisingly less than positive. Not a single analyst provided a "buy" or "outperform" rating. This was somewhat peculiar considering that all four analysts worked for the banks that served as the underwriters of the popular company's initial offering. With somewhat tacit candor, it appears as if the lack of enthusiasm over Yelp's current valuation sends a clear warning to investors that their positions might be stretching the upper limits of a rational valuation.

The reviews came in as follows:

• Citi Analyst Mark Mahaney rated Yelp with a $28 target.
• Goldman Sachs analyst Heath Terry rated Yelp with a $26 target.
• Jeffries analyst Youssef Squali rated Yelp with a $23 target.
• Oppenheimer analyst Jason Helfstein rated Yelp with a $23 target.

As of April 11, 2012, Yelp ended the day with a closing price of $25.43 per share. In doing so, the star internet company continues to support a lofty market capitalization of $1.52 Billion. Yet this market valuation appears to come in stark contrast to those deduced by income and cost. According to the company's S-1 Filing, the following observations can be seen:

From a cost perspective, the company appears to be overvalued. As of September 2011, Yelp held $32 million in current assets. Primarily adding on all of its property and equipment, the company held a sum of $42 million in total assets as of September. Considering the lack of profitability, ignoring losses incurred to the present day, and adding on the amount raised in the IPO, Yelp would appear to have a conservative total asset value of $149 million. Even before deducting the total debt owed by the company, its clear that the market has factored in quite a premium to the company from a cost perspective.

From an income perspective, the company hasn't appeared to fair much better. As it stands, Yelp saw losses of $7.5 million as of September 2011. While the company's revenues may have increased 80% over the comparable 9-month time period from 2010 to 2011, the total costs and expenses appeared to have increased 61% as well. Yelp has only managed to trim a mere 10% of its losses from operations over this time period.

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Despite all logic, the market valuation remains high for Yelp on the anticipation of future growth and the ever-present possibility of a buyout offer. With such speculation on hand by an audience drawn to the popularity made possible by Yelp's business model, one begins to wonder how long it will take before the market begins to realign itself to the company's fundamentals. One look at social internet peer Groupon (GRPN), and it becomes pretty clear to see that bubbles aren't meant to be endured forever. Yet until that day, it appears investors are more than eager to delude themselves into thinking that Yelp will soon be able to turn a sizeable profit to justify its current price tag. Indeed, they might be waiting for some time.

Disclosure: I am short YELP.