20 times sales? Yelp* - FT.com Do you want to take advice from people who use a lot of exclamation marks? Or capital letters for emphasis? Or, getting right to the point, from people who spend their time posting opinions to websites? Using Yelp for long enough tests one's faith in people. But the 66m monthly visitors to the local business review site, and the 25m reviews they have posted, suggests there is value here. That Yelp's shares rose above $24 on its first day of trading on Friday, valuing the lossmaking company at $1.5bn, seconds the notion. Your inner snob is outnumbered, once again. Considered as a business, rather than a product, Yelp has appeal. Because users come to the site looking to buy something (a meal, plumbing services, and so on) in specific areas, it is a natural home for highly targeted advertising. And, indeed, local advertising sales rose 73 per cent in 2011, to nearly $60m. The worry, however, is on the cost side, which grew nearly as fast as revenue. Marketing costs alone sop up two-thirds of revenues. Yelp only makes sense as an investment if, as it grows, it can get significant leverage over these costs. If the company cannot achieve operating margins of, say, 20 per cent within the next three to four years - admittedly short of Google or Facebook, but a long haul from Yelp's current losses - investors have to input fairly racy growth assumptions into a discounted cash flow model to return a $24 share price. But Yelp's business is about selling its services into specific cities and neighbourhoods. Marketing costs, therefore, may not be as scalable as many hope. Of course, the whole cost equation changes very fast if Yelp gets bought by a company that already has a huge technological and marketing backbone: Google or Yahoo, say. That prospect may have more to do with Yelp's five-star valuation than anything else.