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Why Yelp Is Smart to Send the Stock Lower

NEW YORK ( TheStreet) -- If you're a long-term investor in Yelp (YELP - Get Report), you should be applauding the company's move to send the stock lower Tuesday.

As part of the company's earnings, Yelp announced it would be doing a secondary offering, raising about $250 million in Class A common stock to help shore up its balance. Its underwriters have the option to purchase an additional $37.5 million in shares. In a press release, Yelp said the proceeds would be for additional working capital and general corporate purposes as well as acquisitions.

Given the highly competitive nature of Silicon Valley, and the exceptional run-up in the company's share price, this was the logical outcome. In fact, it was something I suggested Yelp do just three weeks ago so the company could shore up its balance sheet as it looks to expand to new markets.

Initiatives like Yelp Platform, which was launched in July, overseas expansion (Yelp is now in 111 markets), and acquisitions aren't cheap. To boot, Yelp is not yet profitable, having lost cents 4 cents a share last quarter. Raising additional equity affords Yelp the opportunity to continue exploring new markets, and growing at an exceptionally fast rate while not having to worry about running out of cash.

As of the end of Sept. 30, Yelp had $101 million in cash and cash equivalents on its balance sheet, up from $96.8 million in cash and equivalents on its books as of June 30, 2013.

Other tech companies like Zillow (Z - Get Report) and LinkedIn (LNKD - Get Report) already have raised additional capital, allowing the companies to expand into new markets, make acquisitions, and cater to portfolio managers who are desperate for shares in these companies as growth trajectories continue to soar. I expect Yelp's secondary will receive exceptional demand as Zillow's and LinkedIn's did given the company's strong growth prospects.

The San Francisco-based online urban city guide reported a third-quarter loss of 4 cents a share on $61.2 million in revenue, up 68% year over year. Yelp said it expects fourth-quarter net revenue of between $66 million and $67 million, with adjusted EBITDA between $9 million and $10 million. The company also raised its 2013 revenue guidance. It now expects revenue between $228 million and $229 million, with adjusted EBITDA expected to be in the range of $28 million to $29 million.

It's a smart move by Yelp CEO Jeremy Stoppelman and his finance team to recognize the demand and fervor seen in the equity markets and to take advantage of that for long-term gain while sacrificing a little short-term pain. Shares were down around 8% in premarket trading on Wednesday. As an investor, this is the type of move you want company management to make if you believe in the company's long-term future.

Yelp shares might be screaming lower this morning, but the company's long-term future and its investors should be singing a happy tune.

-- Written by Chris Ciaccia in New York

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