Finally, web IPOs have something to Yelp about

August 5, 2013, 9:00 AM UTC

By Kevin Kelleher, contributor

FORTUNE — In the consumer-web industry, the landscape has been largely divided between the big fish and the small fry. The most-discussed companies have either been giants like Google (GOOG) or Facebook (FB) or red-hot startups with lean staff and viral offerings such as Pinterest or Tumblr.

In between these two camps, however, is a small crowd of companies that are too small to be giants and too old to be startups. The best of them emerged five or 10 years ago and went public in the past few years. Some, like Zynga (ZNGA) are having a rough go of it. But others, like Yelp (YELP), TripAdvisor (TRIP), Pandora (P), and OpenTable (OPEN), are without much fanfare having a great year in 2013.

Much of the discussion about consumer-web stocks this summer has focused on Facebook, Yahoo (YHOO), and Google. All of them have impressed with strong earnings in recent quarters, and their stocks are up, respectively, 28%, 40%, and 41% in the year to date.

As impressive as those stock performances are, several mid-sized web companies are doing better — in some cases much better. OpenTable is up 42% this year. TripAdvisor is up 81%. Pandora has more than doubled this year, rising 104%. And most impressive, Yelp has gained 173%. After a little more than 16 months, Yelp is trading at $51.50 a share, more than three times its $15 offering price.

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Yelp is a good case study in how established but mid-sized web companies are navigating growth in a competitive and evolving market. The company reported $55 million in revenue in the June quarter, a fraction of Facebook’s $1.8 billion and Google’s $14 billion. But revenue grew 69% from the same quarter a year earlier, faster than Facebook’s 51% and Google’s 18%.

More encouraging for investors, Yelp managed to lower expenses this quarter without hurting that revenue growth. Sales and marketing, the company’s biggest expense item, fell to 56% of revenue from 62% a year earlier. Product development costs rose to 15% from 13% as the company hired engineers to work on new features like Call to Action, a promotion feature that lets merchants offer movie tickets or discounted deals on Yelp.

All told, the operating costs were low enough that Yelp posted a loss of one cent a share. That is still not the black ink many investors demand, but it’s two cents lower than a year ago and much better than the consensus 4-cents-a-share loss that Wall Street had been forecasting. And the company’s cash flow from operations swung to a positive $5.1 million last quarter from a negative $2.4 million a year ago.

In other words, Yelp’s expansion isn’t losing momentum even as the company tightens up its costs and invests in new areas of growth. Local advertising — enhanced profiles and in-site ads for merchants — makes up 81% of Yelp’s total revenue. It’s still growing by 77% a year. In the early markets like San Francisco that Yelp first launched in in 2005 and 2006, local ad revenue is still rising 43%. For a web company Yelp’s age, that growth rate isn’t bad.

Meanwhile, the company is making decent gains in mobile. Three-fifths of searches made on Yelp came on mobile devices (46% from its app alone, the rest through mobile browsers). And 40% of ad impressions in the quarter were shown on mobile devices.

Yelp is adding new features to take advantage of the fact that, according to Nielsen, 89% of consumers who research a business on Yelp make a purchase within the following week. This month, it rolled out its Yelp Platform to let people order food delivery through the site. It also bought Seattle-based SeatMe to add online reservations to its site.

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In a market where people are learning to instinctively Yelp nearby restaurants when hunger strikes on the road, the site and its new services are luring in new local businesses. Last quarter, Yelp brought in 6,800 new paying accounts, “our largest quarterly increase,” CEO Jeremy Stoppelman said in an earnings call.

Yelp’s stock rose 23% on the day after its earnings, winning upgrades from three analysts. Blake Harper at Wunderlich Securities said Yelp is becoming “a clear winner in local and mobile” and is doing a good job managing threats from Facebook and Google, which relaunched its Zagat site and app this week.

Another analyst, J.P. Morgan’s Kaizad Gotla, said in a report, “These revenue gains are sustainable and the core local advertising segment continues to witness very strong growth as Yelp takes share of local advertising dollars, particularly from traditional Yellow Pages.”

So after a few years of Wall Street wondering whether the recent crop of consumer-web IPOs were undercooked, over-promised companies, things are starting to change. Yelp is showing that, given time, growth can come. The question now is whether Yelp and its mid-sized peers are, like Facebook, getting a little expensive for their shareholders’ own good.