On Friday, Yelp saw its shares jump 64 percent in its first day of trading. The online review site’s shares went from $15 per share initial pricing to $24.58, a hike that some people equated to gains made during the dot-com boom.
Yelp’s second day of trading, however, was quite different. The stock plunged nearly 15 percent yesterday, lowering its market capitalization to $1.26 billion. While this contrast is pretty significant, it is not surprising to Francis Gaskins, the President of IPODesktop.
As he explained to us, the supply and demand for Yelp aren’t equalized at this point. The company has 66 million active users who were “overly enthusiastic” on Yelp’s initial day of trading. However, Gaskins told us that this trend would fade gradually since there are some blatant concerns that could become very real issues.
For starters, Yelp has some questions regarding its profitability. It makes money through Internet advertising, which primarily comes from small businesses. The problem is that small businesses are continuing to struggle in this economy, meaning that Yelp could face monetization challenges.
Also, the company is part of a very competitive and growing marketplace. Google, who is its competitor, is also the biggest source of traffic for Yelp. The company has accused Google of showing favoritism toward its own products in the search results and has even testified against Google for doing this.
Even though Yelp isn’t as prominent in Google’s search results anymore, Google is still indirectly responsible for much of its revenue. Gaskins told us that this dependence on Google could be dangerous for Yelp since an update to Google’s algorithm could change everything.
With these red flags and others, Gaskins believes that Yelp may have a rough road ahead as it attempts to overcome the odds.
What are your thoughts on Yelp’s IPO? Do you agree that it faces some big challenges? Let us know in the comments.