Yelp Inc. (YELP) has seen its shares drop by 20.7% so far this year, falling short compared to the Zacks Computer Technology sector, which returned 30%, the Zacks Internet Content industry at 14.8%, and the S&P 500’s gain of 26.1%.
As Yelp holds a key position in providing reviews and ratings for local businesses, this downturn raises an important question for investors: Is now the right time to buy, hold, or sell Yelp stock?
Yelp’s Struggles Amid Competition and Economic Challenges
Yelp’s Restaurant, Retail, and Other (RR&O) segment has seen revenue decline for four straight quarters. This trend is largely due to ongoing economic challenges affecting the restaurant and retail sectors, which rely heavily on Yelp’s services. In the third quarter of 2024, RR&O division sales fell by 6% year-over-year to $116.4 million.
Advertising revenue accounts for more than 95% of Yelp’s total earnings, making it highly reliant on this stream. Paradoxically, the majority of traffic to Yelp’s website comes from its competitor, Google. Yelp faces intense competition from major advertising platforms operated by industry giants like Alphabet (GOOGL), Microsoft (MSFT), and Meta (META).
Services like Google Maps, Google My Business, and various search ads are direct rivals to Yelp’s local business listings. Furthermore, Microsoft’s Bing search engine offers similar local results, while Meta’s platforms provide business pages, targeted ads, and user-generated reviews that challenge Yelp’s dominance.
Yelp’s Year-to-Date Performance Snapshot
Image Source: Zacks Investment Research
Positive Trends in Advertising Revenues
Despite the heavy reliance on advertising revenue, Yelp has seen growth in its advertising services. In the third quarter of 2024, advertising revenues grew by 11% year-over-year, reaching $228 million. This surge is attributed to increased demand from advertisers and a rise in the number of paying ad locations.
Additionally, Yelp’s approach of offering advertising plans without a fixed term has led to an upturn in paying advertiser accounts and strong retention rates, particularly among cost-per-click (CPC) advertisers. This pricing strategy aims to provide users with a variety of options to support their growth.
Investments in artificial intelligence and machine learning have further enhanced ad clicks while lowering average CPC costs. Yelp is committed to improving user experience through several enhancements, including accessibility features. These efforts are expected to foster greater engagement and loyalty from users, contributing to future revenue increases.
For 2024, Yelp forecasts revenues between $1.397 billion and $1.402 billion. The Zacks Consensus Estimate stands at $1.41 billion, suggesting a year-over-year growth of 5.7%.
Investment Outlook for Yelp
While Yelp grapples with notable economic and competitive obstacles, the company continues to report growth in advertising revenue.
Given these circumstances, it is advisable for investors to hold onto this Zacks Rank #3 (Hold) stock at this time. To explore further investment opportunities, you can view the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
