Out With the Old (Restaurants), In With The New (Services)
Yelp is perhaps most well-known for providing user reviews for restaurants and local businesses. Yet their business model is evolving, and while restaurants aren’t being abandoned, they are no longer the overwhelming focus for the social media platform. This is good news, as in their earnings call, company leadership acknowledged that the restaurant industry is facing mounting headwinds. Restaurant, retail, and other (RR&O) shrank by 5% during the last quarter in the face of macro headwinds and declining ad spending on the part of restaurants. Below, you can see that ad clicks have been decreasing rather rapidly.
In the face of headwinds in the RR&O segment, management is shifting focus to services. You can now use Yelp to find plumbers, electricians, auto repair, landscapers, and more. Finding skilled tradespeople and the like can be daunting for the average consumer because the knowledge gap between the consumer and the professional is quite huge. Many people fear getting ripped off. A platform like Yelp can help reduce risks by increasing transparency and allowing people to provide feedback, positive or negative.
Not only can you see reviews, but you can also see response times, pictures of work completed, services offered, and various other details. Yelp provides a protection plan to cover property damage, substandard work, and more. Yelp can also ensure that the professionals are licensed, which, if nothing else, should provide peace of mind. Getting repair work done can be taxing and daunting, so anything that adds peace of mind can add a lot of value.
The home repair market is massive. In 2025, Mordor Intelligence estimates that it will be worth $870 billion. If Yelp can capture just a small share of this market, it could have a lot of clout and potential value on its hands. Of course, capturing a share of that market is easier said than done, but Yelp is already a familiar brand for many people, and I believe the transition into services won’t prove especially difficult. The automotive repair market isn’t as big, but it’s still worth hundreds of billions, as shown below.
Fundamentals and Valuation Considerations
When you look at the basic fundamentals, YELP is a pretty attractive stock. YELP’s GAAP TTM PE ratio is a healthy 14.37, below the sector median of 20.61. The Price/Sales ratio is a bit more expensive at 1.42, above the sector median of 1.27, but this still strikes me as a healthy number. The low PE ratio is especially attractive in my opinion, given that we live in an era of expensive PE ratios, especially in the tech field. One of the better comps for YELP is Nextdoor, a locally-focused social media network, but right now, Nextdoor isn’t profitable, so there’s no PE, while the PS ratio is quite high at 3.08.
Unlevered free cash flows, as shown above, have been trending up, but declined in 2024 from 2023. Revenue YOY grew at a relatively healthy 5.37%, compared to the sector median of 3.32%. That said, Nextdoor outpaces YELP with a 9.65% revenue growth rate (YOY). Yelp’s 10.28% net income margin is healthy too, outpacing the 4.42% sector median, and vastly better than Nextdoor’s -25.72% net income margin. YELP has $311.1 million in cash and short-term investments and $980.2 million in total assets, versus $155.7 million in current liabilities and $233.8 million in total liabilities. I had been expecting to see more distressed numbers here, given the low PE ratio and general skepticism around the company, so this was a pleasant surprise.
Seeking Alpha’s quant tools give YELP a hold rating, with momentum scoring the lowest. I tend to deemphasize momentum, as I believe it can be an emotionally driven trend. The C+ valuation grade is a bit ungenerous in my opinion, given the low PE and reasonable PS score. Seeking Alpha’s analysts also give YELP a hold rating, with optimism for the stock cooling off in recent weeks (Keep in mind, however, that this is a lightly covered stock, so a few grades can quickly sway the rating averages, which indeed appears to be why the average dropped to hold).
While the fundamentals are quite solid, I believe that it’s YELP’s push into services that will either make or break the company. If Yelp can secure market share and become a reliable source for home repairs, auto repairs, and the like, the future is bright. Meanwhile, I believe Google reviews are slowly eroding Yelp’s position with recommendations for restaurants and the like.
