Chit Chat Stocks: "One Forgotten Small-Cap Stock I’m Buying Today"

Episode Date: October 15, 2025
Hosts: Ryan Henderson & Brett Schafer
Subject: Deep Dive on Yelp (YELP) as a Forgotten Internet Asset and Investment Opportunity

Episode Overview

In this episode, Ryan Henderson presents a thoroughly researched investment thesis on Yelp, focusing on its evolution, business model, current financials, and investment prospects. Brett plays the role of inquisitor, challenging common investor perceptions and guiding the discussion through competition, management, and financial metrics. Together, they assess whether Yelp—largely overlooked and trading at less than 10x earnings—represents a compelling small-cap investment opportunity.

Key Discussion Points & Insights

1. History and Evolution of Yelp

[00:32-09:24]

• Founding Story:
  • Yelp was founded in 2004 by Jeremy Stoppelman and Russell Simmons while working at Max Levchin’s business incubator (Levchin is now CEO of Affirm).
  • Stoppelman’s personal struggle to find doctor referrals in a new city inspired the crowdsourced review platform concept.
  • Initial growth came from purchasing a spotty local business database and iterating on user review mechanics, eventually leveraging the viral effect when visitors spontaneously started submitting reviews (“Want to review this business?” button).
• Early Network Effect:
  • Any customer could leave a business review, building a self-reinforcing repository of local business opinions—a crucial, hard-to-replicate asset.
• Major Events:
  • In 2009, Google tried to acquire Yelp for $500M; deal fell through, partly due to Steve Jobs advising against it. Post-study, Google allegedly integrated many Yelp features into Google Maps, igniting long-term direct competition.
  • Yelp IPO’d in 2012 at a $900M valuation, quickly soaring to a $7B market cap by 2014. Today, with 6x more revenue, the market cap is just $1.9B [09:08].
• Memorable Quote:

  “If you look at the financials, they’re actually doing sneakily well.”
  —Brett, [00:32]

2. Yelp’s Current Business Model and Revenue Drivers

[09:24-17:09]

• Main Revenue Source:
  • 95% comes from a cost-per-click (CPC) advertising model for local businesses; businesses promote themselves via sponsored results or competitor pages.
  • Remaining revenue (about 5%) comes from business page upgrade packages (badges, ad blocking on one's own page), and a nascent $10M ARR data licensing stream for AI/ML applications, but this is “a drop in the bucket.”
• Major Asset:
  • The repository: 8 million claimed businesses, 300M+ cumulative reviews.
  • Critical advantage is depth/credibility of real consumer reviews, especially in non-restaurant sectors.
• Key Shift:
  • Only 32% of ad revenue now comes from restaurants/retail; a dominant 64% comes from services like home repair, auto, and professional services.

  “Services professionals pay two times more on average than the restaurant and retail side of things.”
  —Ryan, [14:26]

  • The pivot to high-ticket services (plumbers, electricians, etc.) is driving both revenue per customer and total segment growth.

3. Competition in Today’s Landscape

[17:09-24:23]

• Restaurant/Retail Side:
  • Yelp’s edge has sharply eroded as Google Maps, Apple Maps, social media (Instagram, TikTok, Reddit), and food delivery platforms now dominate consumer attention.
  • “Yelp is losing… that space is really crowded. I imagine Yelp is going to lose business there over time.”
    —Ryan, [18:45]
• Services Side:
  • Main rivals are now marketplaces Angie (formerly Angie’s List) and Thumbtack.
  • Yelp’s services ad revenue has caught up to (and overtaken Angi): Angie fell from nearly $2B to $1B in revenue, while Yelp services grew from ~$670M to $925M in three years.
  • Real time example: Yelp’s “request a quote” button on services leads to instant competitive offers, creating strong value for both users and service businesses.
  • “Classic market share taker situation for Yelp. I don’t see any reason why this wouldn’t continue.”
    —Ryan, [22:03]

4. Platform Dependence and Market Position

[24:23-28:06]

• Risk of Being “Beholden to Google”:
  • 30M unique users use the Yelp app directly, but most still come via mobile/desktop web—largely via Google search.
  • “That’s been the case for 20 years. And they’ve been able to drive value… despite Google being the number one driver of demand for them.”
    —Ryan, [24:23]
• Yelp’s Stronghold:
  • More rigorous fake review detection. Yelp invests heavily in AI-driven review verification (“Focus matters for companies... Yelp, it’s critical for their business.” —Ryan, [26:57]), making its reviews more trustworthy according to hosts’ experience.

5. Competitive Advantage & Network Effect Assessment

[28:06-31:16]

• Is Yelp Moaty?
  • Not a “wide moat,” but relative to startups and new entrants, Yelp benefits from network effects rooted in its vast historic database and brand leverage as a “customer recourse.”
  • Distinct advantage over rivals: Many service pros lack web presence; Yelp offers them an instant listing and lead-gen solution that Google doesn’t conveniently match.
  • Metrics to monitor: # of service business advertisers, user growth, and service segment ad revenue.

  “I wouldn’t say this is a super wide competitive advantage. But within the services category, I think it’s a growing one.”
  —Ryan, [29:44]

6. User & Advertiser Growth: The Mixed Picture

[31:16-37:54]

• User Trends:
  • Post-COVID: Total users dropped 25% in 2020 and have not fully recovered; recent data is flat to up “1-2%” per year at best.
  • Mobile app engagement is more meaningful and likely undervalued in old reporting, but has been basically flat (30M MAUs out of total ~125M unique users)[34:54]. Some recent alt-data (from Apptopia) shows 6–7% MAU growth.
• Advertiser Trends:
  • Restaurant/retail advertisers steadily shrinking; services advertisers rising and now leading, with much higher average CPC.
  • “As long as the services side continues to grow, it should eventually start to offset any declines from the restaurant and retail.”
    —Ryan, [37:53]

7. Financials: Profitability, Margins, and Capital Allocation

[40:35-44:51]

• Operating Margins:

  • Margin expansion story: 2% (7 years ago) → 13% today. Management expects to improve further as they:
    • Shift hiring away from Bay Area
    • Increase remote work
    • Emphasize cash compensation over stock
    • Expand AI-driven efficiency.

• Best Quotes:

  “We continue to expect our stock based compensation expense as a percentage of revenue to decrease to less than 8% by the end of 2025. We also now plan to reduce that to less than 6% by the end of 2027.”
  —Ryan (quoting 10-K), [40:52]

• Share Buybacks:

  • Aggressive buybacks: Shares outstanding declining at 5.7% over the past 12 months. Buyback yield currently at 13.5% (pre-SBC), netting to 5-6% after accounting for SBC.
  • “If you’re taking that cash flow to buy back stock… [and] SBC is coming down… 4% annual share count reduction could go to 6, 8, even 10%.”
    —Brett, [44:08]

8. Valuation & Investment Case

[44:51–50:23]

• Valuation Math:

  • Current EV/EBIT = 8.9x
  • If services business succeeds, Ryan forecasts $400M+ operating income by 2030, implying just 4x 2030 operating income on today’s enterprise value.
  • Additional upside from relentless buybacks (“share cannibal” scenario), plus possible multiple expansion (re-rating).
  • Growth levers: Number of advertisers, cost per click (CPC, which has grown 8% annually), and margin expansion.

• Quote:

  “Either they are going to be one of the best share cannibals of the next decade… or they’re going to get a RE rating in the stock.”
  —Ryan, [49:06]

9. Management & Incentives

[50:23–54:18]

• CEO: Jeremy Stoppelman, co-founder, at the helm for 21 years.
• Incentive Structure:
  • Management comp is a sore spot: Heavy use of relative return targets (vs. poor-performing peer group, e.g., Angie), leading to bonuses for underperformance (“Somehow, despite the stock going down, over the last three years, they earned 50% of their target compensation…” —Ryan, [52:43]).
  • CEO owns 6.3% of shares but still draws $10M/year in additional stock compensation—seen as an unnecessary dilution.
  • “If you need cash, pay a small dividend.”
    —Brett, [54:15]

10. Investment Outlooks & Final Takeaways

[55:26–58:25]

• Ryan: Initiating a “starter position” in Yelp, tracking health of services business to decide if/when to add more. Enthusiastic about the risk/reward at current valuations “if you’re right about services.”
  • Three key tracking metrics: # service advertisers, service user growth, service ad revenue.
  • Not a “never sell” business yet—but if service segment compounds, could become one.

  “In my head, this is not a never sell. Like right now in its current state, this is not a never sell stock. But if they expand that marketplace... then it could turn into one where it becomes sort of more of a never sell.”
  —Ryan, [57:31]

• Brett: Sees Yelp as “playing defense” now, with potential to pivot to offense. Advocates buying in tranches as business execution continues and risks subside, even if share price increases.

  “Almost buying third strategy... the business is showing that potential that you’re looking for here and then you could even buy more in the future despite it. If their business prospects work out as you think they could, the stock will likely be higher, but it might be de-risked.”
  —Brett, [58:01]

Notable/Memorable Quotes

• “If you look at the financials, they’re actually doing sneakily well.” —Brett, [00:32]
• “The massive repository of real consumer reviews for local businesses is very difficult to replicate and it is why people constantly come back to Yelp today.” —Ryan, [09:52]
• “[In services] the majority of the advertising is much more valuable to those professionals… Services professionals pay two times more on average than the restaurant and retail side of things.” —Ryan, [14:26]
• “As long as the services side continues to grow, it should eventually start to offset any declines from the restaurant and retail.” —Ryan, [37:53]
• “If the services business is successful, [Yelp] could be one of the best share cannibals of the next decade.” —Ryan, [49:06]
• “Why is the co founder and CEO who owns 6.3% of the company taking an extra $10 million in annual compensation in stock?” —Ryan, [54:02]
• “If you need cash, pay a small dividend.” —Brett, [54:15]

Timestamps for Key Segments

• History / Founding of Yelp: [01:48–09:08]
• Business Model Evolution: [09:24–17:09]
• Competitive Landscape: [17:09–24:23]
• Platform Dependence/Risk: [24:23–28:06]
• Competitive Advantage/Moat: [28:06–31:16]
• Users & Advertisers/Segment Dynamics: [31:16–37:54]
• Financials, Margins & Buybacks: [40:35–44:51]
• Valuation Analysis: [44:51–50:23]
• Management Critique: [50:23–54:18]
• Final Verdict/Portfolio Action: [55:26–58:25]

Conclusion

Yelp may be an overlooked asset, suffering from multiple compression despite strong underlying profitability and pivot to high-value service sectors. If management executes on margin expansion and service ad growth, Yelp offers compelling upside, especially with share count steadily shrinking. Potential exists for further business model evolution (e.g., bookings, deeper service integrations). Main risks are tied to Google/AI platform reliance, advertising customer concentration, and management incentive alignment.

Actionable Takeaway

Ryan is buying a starter position and suggests investors should track growth in service advertisers and revenue, while keeping an eye on compensation and buyback discipline.

This summary omits ads and peripheral discussions to focus on main investment content, as requested.