Steadfast Over 5% of Yelp Again

Yelp’s peers include Google and Facebook Inc (NASDAQ:FB), whose Social Graph may be used partly as a way for users to find local businesses which their friends (or friends of friends) have used and liked. We can also compare Yelp to Groupon Inc (NASDAQ:GRPN), an alternative source of marketing services for local businesses, and to OpenTable Inc (NASDAQ:OPEN), which offers restaurant reviews as well as reservation services. Google may be on the most solid valuation grounds of the lot: its trailing P/E is 25, but it has very real earnings growth prospects in its search business as well as potential gains from further integration of its Motorola acquisition. Groupon, like Yelp, has been unprofitable recently and even though analysts are expecting improvement at that company as well its forward earnings multiple is 20. While the stock has rallied recently following the exit of its CEO, it’s not clear to us that the core business has actually improved.

Facebook and OpenTable are likely to experience growth in net income over the next few years as well, but in the case of those companies we would worry that their current valuation already accounts for all of this growth and more. Facebook trades at 33 times forward earnings estimates, while OpenTable’s forward P/E is 27. Those projections are based on assumptions of significant growth; OpenTable’s numbers have actually not been that good recently and Facebook- while revenue was up 40% last quarter compared to the fourth quarter of 2011- has not done as well in terms of its bottom line and so we would need to see better results from the company before considering it as a potential growth stock.

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