Yelp Inc. YELP shares have lost 20.7% in the year-to-date period, underperforming the Zacks Computer Technology sector, Zacks Internet Content industry and the S&P 500’s return of 30%, 14.8% and 26.1%, respectively.
Given Yelp’s position as the leading source of reviews and ratings for local businesses, this underperformance is disappointing. This raises a crucial question for investors: Is it the right time to buy, hold or sell Yelp stock?
Yelp Faces Competitive and Economic Headwinds
Yelp’s Restaurant, Retail and Other segment is experiencing a deceleration in revenues for the past four consecutive quarters. It was due to persistent macroeconomic headwinds that have challenged restaurant and retail businesses which mainly utilize Yelp’s services in the RR&O category. In the third quarter of 2024, the RR&O division sales decreased 6% year over year to $116.4 million.
YELP is highly dependent on advertising revenues, which contribute to more than 95% of its total revenues. Ironically, its biggest chunk of revenues is dependent on its competitor, Google, which drives traffic toward Yelp’s website. Yelp faces significant competition from other advertising platforms owned by other Internet giants like Alphabet GOOGL, Microsoft MSFT and Meta META.
Google Maps, Google My Business, and search ads directly compete with Yelp's local business listings. Microsoft’s search engine, Bing, also provides local search results similar to Yelp’s listings. Meta’s Facebook and Instagram platforms are crucial competitors, offering business pages, targeted advertising and user-generated reviews.
Yelp YTD Performance
Image Source: Zacks Investment Research
Yelp Gains From Advertising Services
While Yelp’s business model is heavily reliant on advertising revenues, a positive aspect is that the company has managed to achieve consistent growth in its advertising services division. In the third quarter of 2024, advertising revenues for the Services business grew 11% year over year to $228 million, driven mainly by strong demand from advertisers and a rise in paying advertising locations.
Moreover, Yelp’s shift toward selling advertising plans without any fixed duration is resulting in a solid rise in paying advertiser accounts. Further, it is witnessing strong retention rates and improving overall retention for cost-per-click (CPC) advertisers. Yelp’s strategy to provide products across a range of price points will give users more ways to grow with it.
Yelp's continued investment in artificial intelligence and machine learning has enabled it to increase ad clicks and decrease average CPC. Yelp has also implemented various other user experience and backend improvements, including features designed to cater to users with accessibility needs. These initiatives reflect the company’s broader commitment to enhancing the user experience, which is likely to drive higher engagement and loyalty on the platform, ultimately contributing to sustained revenue growth.
For 2024, the company anticipates revenues between $1.397 billion and $1.402 billion. The Zacks Consensus Estimate for revenues is pegged at $1.41 billion, indicating year-over-year growth of 5.7%.
What Should Investors Do?
Although Yelp faces significant headwinds from macroeconomic and competitive facets of the business, YELP has managed to grow its revenues on the back of its robust advertising services.
Considering all these factors, we suggest investors to retain this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
