John Burbank’s Passport Capital Is Another Yelp Bull

We can compare Yelp to Facebook Inc (NASDAQ:FB), which is developing its Social Graph partly as a way for users to find local businesses their friends like; Google Inc (NASDAQ:GOOG), Groupon Inc (NASDAQ:GRPN), whose local deals offer an alternative source of marketing for local businesses; and OpenTable Inc (NASDAQ:OPEN). Google, as the most established company out of this peer group, trades at 14 times forward earnings estimates. That figure is based on expected earnings growth from both the search business and from improvements in integrating Motorola Mobility Holdings, so investors should not take it quite at face value though there is certainly potential for improvement on both fronts.

Facebook’s forward P/E is 36; again, this is based on consensus of high earnings growth and so we would be cautious. We also haven’t been particularly impressed with Social Graph; while it has some prospects, it’s not enough to justify a valuation of $30 per share. Groupon and OpenTable are similar situations, though in those cases nobody is looking for a monetization strategy: the improvements in these businesses this year, which would still place their earnings multiples in the 20s, are supposed to come from their current revenue-generating offerings continuing to grow enough to carry net income higher. We think that investors should avoid both of these stocks, as Groupon is actually currently struggling with profitability and there have been some concerns that OpenTable- while it’s certainly a valuable service- may have trouble winning over marginal customers. We’d note that they are also both popular short targets.

Disclosure: I own no shares of any stocks mentioned in this article.