Yelp YELP, the platform synonymous with connecting users to local businesses, has seen its shares plunge 11% over the past year. This underperformance compared with the Zacks Computer and Technology sector's 12.4% return and the Zacks Internet – Content industry’s 8.7% appreciation highlights challenges stemming from softness across its restaurant and retail business segments and rising competition.

Yelp’s Restaurant, Retail and Other (RR&O) segment has been experiencing a deceleration in revenues for the past five consecutive quarters. It was due to persistent macroeconomic headwinds affecting consumer spending that have challenged restaurant and retail businesses, which mainly utilize Yelp’s services in the RR&O category. In the fourth quarter of 2024, the RR&O division sales decreased 3% year over year to $470 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, a subsidiary of Alphabet GOOGL, which drives traffic toward Yelp’s website. Yelp faces significant competition from other advertising platforms owned by other Internet giants like Microsoft MSFT and Meta META.

Increased competition from Google AI Overviews, Google Maps, Google My Business, and search ads affect Yelp’s advertising business. 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. Despite high competitive pressure in the advertising space, Yelp’s deepening expertise in its offerings allied to this division is adding to its growth.

1-Year Price Return Performance

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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 2024, advertising revenues for the Services business grew 10.8% year over year to $879 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 2025, the company anticipates revenues between $1.47 billion and $1.485 billion. The Zacks Consensus Estimate for revenues is pegged at $1.48 billion, indicating year-over-year growth of 5%. The consensus mark for earnings is pegged at $2.15 per share, suggesting a 14.4% year-over-year increase.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

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 that investors should 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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This article originally published on Zacks Investment Research (zacks.com).

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