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Yelp co-founders Jeremy Stoppelman, left, and Russel Simmons try the food at a cafe on Union Square in San Francisco, Calif. (Eric Risberg/AP)
Yelp co-founders Jeremy Stoppelman, left, and Russel Simmons try the food at a cafe on Union Square in San Francisco, Calif. (Eric Risberg/AP)

Yelp’s up-and-down cycle a recipe for heartburn Add to ...

Yelp. It’s the name of a social-media site that provides consumer reviews, particularly of restaurants. It’s also the sound shareholders have been making if they bought and held.

The company went public in March at $15 (U.S.) a share and popped to $24.58; at month’s end, it approached $32. But by June, it had more than halved to just over $14. Then four weeks later, it had nearly doubled.

The see-sawing has continued recently, to a lesser extent: Yelp shares have moved by 5 per cent or more in a single session 15 times in the last 35 trading days, going back to Aug. 1.

That includes an eight-day period in mid-August in which the shares fell 5 per cent five times, leading to a cumulative decline of more than 30 per cent. It also includes one-day gains of 22.5 per cent, 10.2 per cent and 9.3 per cent, helping the shares get right back to about $26, where they were in the second week of August.

Every little bit of news seems to move the needle at Yelp in a big way. One of the latest events: The lockup period for insider sales expired, and yet many insiders didn’t sell. (Unlike at, say, Facebook.) This, argued some, prompted a short squeeze, in which investors betting Yelp shares would fall instead had to rush to buy and cover their positions.

As of now, at a high point of the recent up-and-down Yelp cycle, the stock now ranks as one of the most expensive of this year’s class of consumer Internet companies.

Its enterprise value – market capitalization plus net debt – is more than 100 times forward estimates of its EBITDA, or earnings before interest, taxes, depreciation and amortization.

While music streamer Pandora Media Inc. is at nearly 250 times, and Angie’s List Inc. isn’t expected to post positive EBITDA in the next 12 months, Yelp is more expensive by this measure than Facebook Inc., Groupon Inc., Kayak Software Corp., LinkedIn Corp. and Zynga Inc. (All of those except Kayak trade at less than 20 times EBITDA, which is still well above the market multiple.)

Only a handful of these names posted positive earnings in the last year, or are expected to post them in the next 12 months, so P/Es aren’t as helpful as they might be.

On a price-to-sales basis – and yes, at least all these companies have sales – Yelp’s 13.5 is exceeded only by LinkedIn’s 17. The median figure for the group is about five (also well above a market multiple.)

It’s a lot for a company that may face great competitive challenges in the future (about half its traffic comes from searches on Google, which seems interested in providing more evaluative content).

The priciness may also help explain why just three of 10 analysts following the company have a “buy” rating, per Bloomberg. (Six rate Yelp a “hold” and one a “sell.”)

After noting Yelp’s second-quarter year-over-year revenue gain of 67 per cent and its increase in unique visitors of 52 per cent, analyst Jason Helfstein of Oppenheimer & Co. Inc. said, “While Yelp’s execution/financial performance exceeds peers’, we maintain our Perform rating on valuation.” (Mr. Helfstein has a target price of $25.)

He also notes one of the investing risks is that “a limited float” – only about a quarter of the company’s 61 million shares are widely held – “increases share price volatility.”

It all adds up to potential heartburn for investors who buy in on the belief Yelp will become the dominant company in the review space.

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