THE COMPLETELY IRRATIONAL REASONS WHY I BOUGHT YELP STOCK TODAY
You cannot rationalize the current $1.5 billion market cap for YELP. That is why I tweeted earlier that this is purely a concept type investment rather than my typical value/restructuring play.
I bought into YELP for numerous reasons. Here is my thinking:
Social Media in 2012 reminds me of where the internet was in 1996. I was sitting at a trading desk for Waterhouse when Yahoo went public. I was surrounded by traders who were skeptical. I had customers who called in and were even more skeptical of the prospects for this burgeoning industry.
Why the skepticism?
There were no metrics or relative comparisons. When you tried to put together the numbers they just didn't add up. The market couldn't assign or rationalize a proper valuation.
The same problem is evident in social media. Here we have companies going public with market caps that are blowing people away. The words "fraud", "overvalued" and "hype" are often attached to these companies. Rationalizing a nearly two billion dollar market cap for YELP is impossible. Rationalizing a nearly eleven billion dollar market cap for LNKD is mind-blowing. And rationalizing a one hundred billion dollar market cap for Facebook seems outrageous.
Rationality fails in these situations. The market proves it time and time again. Yet traders continually turn to rationality in an effort to decipher the mystery of the newest and greatest sectors that consistently cause over-thinking charlatans and articulate incompetents to look mediocre at best and foolish at worst.
I've spent years using YELP to help assist with restaurant reviews and anything else I want an opinion on in the service space. If an individual was to come to me pre-IPO and ask me to guess what the market cap should be? I would not put it past $500 million. $1 billion seems absolutely absurd. $1.5 billion seems like insanity.
Now here is where I am different than most. When I see that my internal compass is off by so much, I don't keep walking in the same direction knowing that I am correct until I fall into the mouth of a volcano. I begin wondering why it is that the market thinks of a company like YELP 200% differently than I do?
That 200% is a premium that the market is assigning to the company above and beyond what the normal mind considers acceptable. In addition, that 200% premium to what the normal mind considers acceptable keeps most out of the stock and attracts short sellers. The perfect combination of events to have a clean and steady uptrend that further reinforces doubt until that singular moment where realization of what the market saw months or years in advance takes place.
By the time that realization occurs, it is far too late. That realization for YELP may come in the form of a buyout as it is the perfect buyout candidate. That realization for YELP may come in the form of the company becoming an integral part of the consumer experience through giving instantaneous reviews for any establishment you are interested in frequenting.
Gone are the days of blindly walking into any service related business and not knowing what to expect. YELP is a key player in absolute transparency of service. It allows consumers to walk into any situation fully informed. It is part of the information revolution that tells you to up your game or your business will be go broke. Transparency is everything and it is instantaneously accessible in today's world.
How will YELP capitalize on this revolution? What will create a steady trend towards positive cash flow? How will the company continue to evolve in such a rapidly changing environment?
I am not sure I know the answer to any of these questions. What I can answer is that the market thinks highly of the company. The price has been extremely resilient since it IPO'd. Facebook is going public shortly and will likely "lift all boats." It is THE destination for consumer reviews. And the potential revenue streams as a result of its dominant position in the market are endless.
I won't go balls to the wall long here like I would in a value play where I was fully comfortable with the downside equation. It is a little more difficult to gauge with YELP which is why I will keep the position mid-sized at most.
I am comfortable, however, that there is substantial upside to be had here as rational thinking fails investors once again.
