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Here's Why Investors Should Retain Yelp (YELP) Stock for Now

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Yelp (YELP - Free Report) is well-poised to benefit from the reopening of economies, which would result in higher ad spending, an increase in Paying Advertising Locations and an improvement in non-term customer retention rate. However, increased spending toward long-term growth initiatives is expected to hurt profitability in the near term.

Let us delve deeper into factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Yelp has been gaining from growing advertising revenues primarily driven by increased local salesforce and transition toward non-term advertising. The company has been transforming its business model toward selling advertising plans that have no fixed duration. This is aiding the company in increasing paying advertiser account retention.

Yelp Inc. Price and Consensus

Yelp Inc. Price and Consensus

Yelp Inc. price-consensus-chart | Yelp Inc. Quote

The online business search, review and recommendation service provider’s sustained focus on portfolio expansion with the launch of Verified License, Business Highlights, Yelp Portfolios, and Yelp Fusion remains a key growth driver. In the first quarter of 2022, subscribing locations for Verified License and Business Highlights increased year over year and boosted the number of paying advertising starts in the Self-Serve channel.

Since the launch of Yelp Fusion in May 2020, the company’s Other revenue segment has been witnessing solid growth. The segment reported over 50% growth (year-over-year growth of 62%) in the latest first quarter 2022 results, courtesy of rapid adoption of the Fusion platform along with a reduction in the relief incentives for the most impacted COVID-19 customers in the form of waived fees.

A healthy and minimal risk-based balance sheet is likely to continue providing stability and buoyancy over the medium to long term. Backed by a strong balance sheet and solid cash and capital position, Yelp is positioned well to make strategic investments in product development and marketing.

Persisting Risks

The decline in food take-out and delivery order volumes, as several restaurants resumed and increased their dine-in operations following the relaxation in social distancing regulations, is likely to continue hurting its transaction revenues in the near term.

Significant competition from Alphabet’s (GOOGL - Free Report) Google, Microsoft’s (MSFT - Free Report) Bing and Meta Platform’s (META - Free Report) Facebook are likely to hamper Yelp’s long-term growth prospects. The company depends mostly on Google to drive traffic to its website. Besides, the company generates the majority of its revenues from the advertising business. Hence, a decline in advertising user growth or a shrunken advertising budget among the users does not bode well for Yelp.

Zacks Rank & Stock Performance

Yelp and Microsoft currently carry a Zacks Rank #3 (Hold), while Google and Meta Platforms have a Zacks Rank of #4 (Sell).

You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here.

Shares of YELP have slumped 23.1% compared with Zacks Internet – Content industry’s 39.8% decline in the year-to-date (YTD) period.

Shares of GOOGL, MSFT and META have plunged 25%, 22.9% and 52.5%, respectively, in YTD.

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