YELP — Yelp Inc. · 2026-09-04 · Verdict: WATCH · Conviction 2
Price $22.42 · Mkt cap ~$1.22B · EV ~$1.22B · EV/EBIT 6.6x (FY25 EBIT) / ~8.5x fwd · FCF yield 26.6% (FY25) / ~20% fwd · Net debt $(5.9)M · ADV ~$26.2M Sources read: 10-K 2026-02-27 (Items 1, 1A, 7), 10-Q 2026-08-07, DEF 14A 2026-04-17, 8-Ks 2026-04-29, 05-07, 06-10, 08-06, Form 4s (12m). No transcript available; fetch fell back to the Q2 2026 press release and Letter to Shareholders (8-K 2026-08-06, EX-99.1/99.2), so quotes are written remarks, not Q&A.
1. What the business actually does
Yelp runs a local business directory and sells pay-per-click ads on it via auction, reporting revenue as Services (home, auto, professional) and Restaurants, Retail & Other (10-K 2025, Item 1). Advertising was $1.391B of $1.465B FY25 revenue. Other revenue, the growth story, is subscriptions (Yelp Host, Guest Manager), data licensing via the Places and AI APIs, DoorDash rev-share, and Hatch, an AI voice and lead-management product bought February 2026 for about $271M cash (10-Q Q2 2026).
2. Why it is mispriced — the edge case
There is no structural edge here. This is a $1.2B NYSE name with $26M daily volume, full coverage, no spin-off, no index event, no forced seller. The discount prices an observable trend: ad clicks have fallen year over year for six straight quarters (-3, -7, -11, -8, -10, -5 percent from 1Q25 to 2Q26; 8-K 2026-08-06, Key Metrics) and paying advertising locations are down from 563k in 2Q23 to 510k. The 10-K itself notes traffic "remains below pre-pandemic levels" and names AI Overviews, AI Mode and chatbots as formats that de-emphasize links to the platform (10-K 2025, Item 1A). No edge means the verdict is capped at WATCH.
3. Unit economics and mix
FY25 revenue $1.465B, +4%, EBIT $184.5M, adjusted EBITDA $369.2M (25% margin), FCF $323.7M (10-K 2025, Item 7). That FCF on today's $1.22B cap is the 27% screen yield, and it is backward-looking: 1H26 FCF was $106.2M versus $132.5M, down 20%.
Mix is the real story. Services advertising was $241.0M in 2Q26, flat year over year after +8% in FY25; RR&O fell 10% to $101.5M. Services is now 70% of advertising revenue versus 62% in 2Q23, so the shrinking half shrinks as a share of the whole, but the growing half stopped growing this year. Other revenue nearly doubled to $33M on Hatch plus data licensing including OpenAI. Yelp has no marketplace take rate, so the proxy is revenue per paying location per quarter: Services $930 versus $926 (flat), RR&O $405 versus $443 (-9%). Blended CPC rose 1% while clicks fell 5%, so the auction charges more for less inventory, which flatters revenue and is not durable.
4. Balance sheet and capital allocation
This is where the thesis breaks. Cash fell from $216M plus $103M of securities at year end to $94M at 30 June 2026, and Yelp drew $100M on its $325M revolver to fund Hatch, turning net cash into roughly $6M of net debt. Yelp repurchased $291.9M in FY25 at an average $33.29 (10-K 2025, Item 7) and about $200M year to date in 2026 at roughly $24.50, taking weighted diluted shares from 65.7M to 55.7M, down 15%. Then: "we have now paused our program as we work to pay down our revolving credit facility. We expect to resume repurchases in 2027" (8-K 2026-08-06, Letter). The 10-Q repeats the pause "through the remainder of 2026." So the lever that dominates the bull math is off exactly while the stock trades at $22, after management spent heavily at $33. $338.7M of authorization remains. SBC is falling from 11% of revenue in 2024 to 9% in 2025 to about 7% now, targeted below 6% by end 2027. Insiders are one-way sellers: zero open-market buys, $18.8M of sales over twelve months, $11.8M of it Stoppelman, who still owns 6.4% (DEF 14A 2026; Form 4s). The CTO and the Chief Product Officer both resigned in 2026 (8-Ks 2026-04-29, 2026-06-10).
5. Management: said versus did
They beat guidance twice: 2Q26 revenue $8M above the high end and adjusted EBITDA $16M above, with 1Q26 EBITDA also $16M above. But the full-year bar moved down in substance: FY26 revenue guided to $1.460B to $1.470B against $1.465B in 2025, flat even with Hatch bolted on, and adjusted EBITDA $315M to $325M against $369.2M, down 12% to 15%. Q3 guidance of $365M to $370M is a 2% to 3% year-over-year decline. On AI, Stoppelman leads with offense: Yelp Assistant generated about 10% of Request-a-Quote projects, Yelp content now powers ChatGPT's local experience, and a commissioned study claims 3.4x the AI citations of the next home services platform. The defensive read is that Yelp is licensing its content to the interface that may replace it.
6. Valuation
Base (45%): revenue flat through 2029, Other revenue hits the $250M run rate by end 2028, adjusted EBITDA stabilizes near $320M, EBIT ~$150M, owner cash flow (FCF less SBC) ~$160M, buyback resumes 2027 at ~$200M a year; 10x owner cash flow on ~48M shares gives about $30. Bear (35%): Services follows RR&O down, clicks fall 10% a year, revenue declines 6% annually, EBIT falls to $100M by 2029; 6x EV/EBIT gives about $12. Bull (20%): Assistant stabilizes clicks, Other revenue compounds, 2028 EBITDA $380M; 12x owner cash flow on ~44M shares gives about $45. Probability weighted about $27, some 19% above $22.42. Reverse DCF: at a 10% discount rate the current EV implies reported FCF shrinking about 11% a year forever, or, charging SBC as the real cost it is, owner cash flow shrinking about 2% a year forever. The first is too pessimistic; the second is close to what the filings show.
7. Catalysts and timeline
Buyback resumption in early 2027 once the revolver is repaid. Q3 print in early November 2026. Other revenue crossing a $150M to $200M annualized run rate in 2027 toward the $250M end-2028 target. Expansion of the OpenAI or Apple Maps deals into paid Request-a-Quote flow.
8. Kill criteria (pre-registered, observable)
- Services advertising revenue declines year over year in two consecutive quarters. Services flat is the floor of the thesis.
- Paying advertising locations fall below 480k in any quarter (485k in 1Q26, 510k in 2Q26).
- Buybacks do not restart by the Q1 2027 report, or the revolver balance rises above $100M.
- FY27 adjusted EBITDA guidance below $300M.
9. Verdict and one-paragraph summary
WATCH, conviction 2. Yelp is cheap on trailing numbers for a reason visible in its own disclosures, and the fact that decides the framing is that the buyback is paused. The 27% FCF yield and the -14% share count that put Yelp on the screen are both historical: FY25 free cash flow was $323.7M but 1H26 ran 20% behind, 2026 adjusted EBITDA is guided down 12% to 15% on flat revenue, and the buyback that shrank the share count 15% is suspended to repay the revolver drawn for the $271M Hatch deal, with resumption only promised for 2027. Underneath, the core is eroding: ad clicks negative for six straight quarters, paying locations down 9% in three years, held up only by rising cost per click and acquired revenue. The offsetting case is real but unproven: Services flat rather than falling, Other revenue nearly doubled to $33M against a $250M run-rate target by end 2028, stock comp falling toward 6% of revenue, and two guidance beats this year. At $22.42 a probability-weighted $27 is not enough margin of safety for a business whose core is declining and whose main shareholder-return lever is switched off. I would rather own it after the buyback restarts and Services holds flat for two more quarters.
Research for discussion, not investment advice. Positions and sizing are the reader's decision.