Yelp's stock was supposed to tank today, or at least experience a dip, but it's doing the opposite of that, up almost 20 percent, as of this writing. Expectations were low for the online review site because today a stock lock-up expired. For a company like Yelp, whose stock has taken a bad turn this month, a lock-up should push the stock down farther, as we learned when Facebook's first lock-up expired. The general idea is: People who couldn't unload their stock before will want to get rid of their shares before the price goes down even further. That is what happened with both Groupon and Facebook (though not as much as anticipated with the social network) when mass amounts of stocks were let loose on the market. But not Yelp. What's going on here? Some theories.
Yelp has growth potential. Unlike Facebook or Groupon, investors see something in Yelp, which "is on its on its way to becoming a household name," one analyst told Bloomberg's Danielle Kucera. Though Yelp hasn't figured out how to convert all of its subscribers to dollars (a classic Internet problem, these days), it has promising mobile integration that has investors interested. It is working directly with Apple to get its results integrated into Siri, for example.
Yelp hasn't totally disappointed investors... yet. Unlike Facebook's investors who have gotten spooked by all the talk about its inability to figure out advertising, Yelp's don't see the company as so obviously hopeless even though the stock hasn't performed so great. Today it's trading lower than it did after its first day on the market. But, it hasn't lost nearly 50 percent of its value, either. "The stock action on Wednesday seems to indicate that Yelp’s biggest investors are holding on — at least for now," DealBook's Evelyn M. Rusli writes. The same can't be said of Facebook, whose biggest investor, Peter Theil, just sold the majority of his shares.
We're seeing a "short-squeeze." When stocks that are supposed to fall have an unexpected up-turn, it facilitates what is called a "short-squeeze," The Wall Street Journal's Kaitlyn Kiernan explains. "As a stock climbs, more and more short sellers scramble for shares--pushing the price up--for fear the stock will rise even higher and they will be forced to pay still more for stock to return to their lenders. This sounds like what happened with Yelp. People thought the lockout would bring the stock down. It didn't. "The shorts got caught with their pants down today, plain and simple," Seth Setrakian, co-head of trading at First New York Securities told Market Beat's Steven Russolillo. "People were making the assumption that lockups automatically bring down the stock."
Maybe the increase in shares encouraged other investors to buy in. Compared to other IPOs, Yelp's didn't put that many shares on the market. Facebook's IPO debut saw 500 million shares traded. Yelp's had just a little more than seven million. But, now, because of the lock-out, there are more floating around the market. The IPO, at a little more than seven million shares, was small enough that some larger investors might not have been comfortable playing in that environment, because they might have worried about getting in and out of positions with so little volume," Randy Warren, chief investment officer at Warren Financial Service told Keirnan. "This might be the first opportunity where these big investors felt safe."