Passport Capital Gives Yelp Inc (YELP) A Positive Review

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John Burbank PASSPORT CAPITALYelp Inc (NYSE:YELP) saw San Francisco-based Passport Capital take a stake of over one million shares, or 6.3% of Yelp’s outstanding shares. Other notable hedge funds that have been upping their Yelp stake over the past few months include Joho Capital, now with 974,000 shares, and FMR, which owns 1.9 million shares (check out hedge funds loving Yelp).
After shutting down its materials fund in mid-2012 following a 31% loss, Passport Capital could use some good fortune, and it appears it is looking to the tech industry. During the third quarter, Passport is not only betting on Yelp, but also upped its stake in Google Inc (NASDAQ:GOOG) by 200% and eBay by 70% (see Passport’s top picks). Although I don’t dislike Yelp, there appears to be a number of questions surrounding the company, despite it being a ‘good house in a bad neighborhood,’ with the neighborhood being newly IPO’d companies.

Yelp’s primary business model includes a social review site covering restaurants and other businesses. The social review company is quickly becoming a top-tier search engine for finding reviews, and is taking market share from the likes of Google and Yahoo! Inc. (NASDAQ:YHOO). As far as U.S. search market share goes, Google is still the unprecedented leader, owing over 66% of the market at the end of the 2012. Yahoo! still struggles to hold its own, as Microsoft still holds the second spot with 15%, versus Yahoo!’s 12%. Google’s industry leading position bodes well for Yelp, given the social review site gets the majority of its traffic from Google.

Yelp managed to raise over $100 million in its IPO, pricing shares at $15 each. The stock has risen 40% since its March 2012 IPO, which is much better when compared to other major recent IPOs. Zynga Inc (NASDAQ:ZNGA is down 70% and Groupon Inc (NASDAQ:GRPN 80% since they started trading. The weakness in both of these newly IPO’d companies brings up questions surrounding their business models. Groupon is being hit by competition, including Amazon-backed Living Social, and Zynga is trying to tailor to a rapidly changing social gaming consumer. Zynga has been struggling to get users to fork out cash for games or game ‘perks.’ Meanwhile, the social gaming company is also struggling with continued growth, as the number of monthly active users contracted from 311 million users in the third quarter to 298 million in the fourth quarter. Daily users also decreased from from 60 million to 54 million. Groupon has been seeing fundamental issues related to sputtering growth. Last quarter the company posted revenue of $568 million, well below analysts estimates of $590, and weakness in Europe continued to plague the company.
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