A (4:09)

That's correct. Yeah. I was going to say the same thing. Founder of Affirm, and I think still running it as of this recording.

C (4:16)

Yeah. And Stoppelman had been the vp. And Stoppelman, I'm going back to that. One of the co founders of Yelp, he had been the VP of Engineering at x dot com. This was prior to Twitter becoming x dot com. This was the original x dot com which, as people that know their business history, you know that X.com eventually was renamed slash, merged into PayPal, which is where Stoppelman met Max Levchin. So Stoppelman is technically one of the members of the PayPal mafia. Probably one of the least known members, I would argue. But nonetheless, he was critical in sort of the early days of PayPal and X dot com. Anyways, as the story goes, Stoppelman got sick. This is kind of the Genesis story. He got sick, needed to find a doctor. He wasn't familiar with the Silicon Valley, San Francisco area. So he tried to look for crowdsourced referrals online and could not find any good ones. And that was apparently the inspiration for wanting to build what is now known as Yelp. So, like I said, he was working at Max Levchin's business incubator. He pitched the idea to Levchin. Levchin apparently said, I Don't really think it's a good idea. But you two are two very good developers and you seem very into it, so I'll give you a million dollars, which I. It's kind of a sound philosophy, honestly. Like, if even though you don't see the vision, if you think really highly of the founders and you have the money to spare and you know that they're going to work hard to build it and build it out, it makes sense as an investment. I'd be surprised if. I imagine that's how a lot of VC investing is done in sort of the early seed rounds. Anyways, to kickstart the platform, they purchased a database of over 20 million local businesses. Apparently this database was a little spotty, but it gave them sort of a jump start for actually building the platform. And then they tried to aggregate your reviews. The first iterations were based around. It was a flop. They tried to have like email invites to review on Yelp and it. It really didn't take off. Like maybe they got a couple, but they were having a hard time getting people to give reviews. And then there was one button that said, like, want to review this business? Or whatever on Yelp. And they noticed when they looked at the data that that was the one that kept getting clicked. So there was a lot of engagement from people that were not being invited, but just general visitors to the wanted to review a certain business. That is what basically allowed them to build on even what is now Yelp today. So the story from there was pretty simple. Any customers could review a business. This created one of the early Internet network effects, right? Because then you've got businesses on there, tons of businesses, tons of customers, tons of reviews. Creates more and more value for future customers because they have this massive repository of reviews. And from there it was just a big success. In 2009, Google tried to acquire them for $500 million. Ultimately, the negotiations failed. Apparently Steve Jobs called Stoppelman and was told him he shouldn't accept the Google acquisition, which does make sense.

A (7:44)

Sometimes Jobs is a little creepy with the phone calls. Did the same thing to Danielle Little threatening style. And what's an interesting part of this, when Google brought in Yelp, their allegations that they essentially looked at the product and then decided to copy a lot of the features for Google Maps. And that's where that direct competition started to play.

C (8:09)

Yeah, the. And you see that today. I mean there's still obviously direct competition. Uh, but if we continue on in the story, the negotiations failed. Google did not acquire them. Yelp decided to go public in 2012 and they got a $900 million valuation. Within two years of their IPO, they had a $7 billion market cap. Fast forward a decade. So that was 2014. Today, 2025, they have six times more revenue and just a $1.9 billion market cap. So it has been a rough decade for Yelp shareholders. But I think we've. Despite good financial performance, I should also add that they have turned. We're going to talk about the sort of turning on the profit machine and growing revenue at a double digit annual rate for a decade. So despite all that, bad returns for shareholders from the high, even from ipo. But potentially it's an interesting time to visit this because I think the business model is shifting a bit.

A (9:24)

Okay, let's look at the business today. How has it evolved? Where are they making money? What Drives Yelp in 2025?

C (9:33)

Yeah, the business model. How the business model actually works is very straightforward. This is not one of those complex businesses where it's going to take a ton of time to describe how it works. They run ads. So There are nearly 8 million claimed businesses on the platform and users have submitted more than 300 million cumulative reviews for those businesses. This is the most important thing to understand about the company. 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.

A (10:13)

I mean, that's the only person that could. Sorry, only company that could replicate it easily is Google. And that's their main competition, I'd say. Although we're going to get into the evolving of the business model later and how they're competing with some other players. This might be something they don't talk about. But are they licensing to kind of Google's AI competitors such as OpenAI or Perplexity? Could that be a part of the business model? Because I could see Yelp, similar to Reddit, being a huge asset for these AI tools.

C (10:49)

Yeah, they said that they are on a 10 million ARR rate for data licensing. Keep in mind, they have. I think it's like 1.4 billion in total revenue. I should actually probably know that figure.

A (11:06)

But we'll get to that later.

C (11:09)

Yeah, I've got all the segment revenue, but I think it's around 1.4 billion. So it's really a small piece of the pie right now. And I imagine it'll stay that way would be my guess. I mean it could maybe it gets to a hundred million ARR at some point margin though.

A (11:27)

Rent.

C (11:28)

Yeah, I mean pretty Much zero cost. But it's not gonna, it's not gonna be as big on the top line as the advertising business that Yelp has. And I just Double checked, yes, 1.4, 1.5 billion in the last 12 month revenue. So yeah, 10 million. An error. Still kind of a drop in the bucket for them. But the primary way that Yelp monetizes its platform is through cost per click ads. So Yelp allows businesses to promote themselves in various spots throughout the app and website. That includes sponsored search results, ads on competitors Yelp pages, as well as other areas throughout the user experience. The majority of these ads are performance based. So they have a digital auction system that prices on a CPC basis and businesses pay a fee when a consumer clicks on their ads. This is, if you want me to go more into depth on that, I'm not going to go too much into it. There are a lot of tweaks that they've built out over the years to the algorithm. So they create sort of dynamic pricing based on how many people are searching for their, that, that type of service at that time. So it, you know, it's very demand based and the CPC changes based on the different services as well, the different business types.

A (12:50)

But you can see why Google wanted to buy them.

C (12:53)

This is the Internet. Yeah. This is meta, Instagram, Facebook, Google, they all run basically the CPC model for the most part. The other way that they, that makes up 95% of their revenue. But they can also offer. This is of a funny way to monetize in my opinion. But they offer upgrade packages for business pages. So some of this is like you can be verified, like you get a little badge, you know, kind of like Twitter does. And that's part of the upgrade package. The other part is you have to pay in the upgrade package. It prohibits competitors from advertising on your page. So if you want competitors to not advertise on your page, you can pay for the upgrade package. That's only like 5% of revenue at the most. I think it's probably less actually. But really the, the big one here is advertising. Advertising accounts for 95% of Yelp's revenue. And when you think of Yelp, at least when, when I was starting this research, when I think Yelp, I think restaurants, I think retail places, right? That is not the biggest part of Yelp's business anymore. So today 32% of Yelp's revenue comes from restaurants and retail businesses advertising. 64% comes from services businesses advertising. And so, and Brett's sharing a chart here that's fiscal data that tracks it. So thank you. Fiscal AI. When I'm talking about services businesses, I'm talking about things like home services. So plumbers, electricians, landscapers, auto services, so mechanics, auto repair shops, that kind of stuff. Professional services, even so lawyers, accountants, real estate agents. You got like, think of those services professions, not the falafel place next door. You might leave a review. There's probably more reviews for the restaurants and retail. But the advertising is much more valuable to those professionals, services type customers. And then within services, the two biggest are home services and auto. So those are kind of. When you think about who is the audience that's driving Yelp. Who's the customer base that's driving Yelp. You got, think plumbers, electricians, auto repair shops, mechanics, that kind of demographic. And the reason this is so important is because A, it's, it's not as competitive as restaurants and retail. The restaurant and retail category is so competitive. We'll talk about that more in a bit. But B, it's a much higher ticket industry. So services professionals are willing to pay a higher cost per click than a restaurant would because instead of a $30 meal, they're maybe landing a thousand dollar job or $2,000 job. Right? So you, you can see this in the numbers you Yelp's spend per customer type. Last quarter, the average spend per services business was $926. The average spend per restaurant and retail business was $440. So services professionals pay two times more on average than the restaurant and retail side of things. This is the direction they are heading. It's where it's what management emphasizes on the calls. It is where they've made some acquisitions to kind of build out their product strategy. It's been focused on the services side of things. The retail. It's great. It's nice to have. They can sell that data to LLMs and stuff like that, but they aren't. I think they've basically got it on autopilot at this point is how I would describe it. Maybe they, I mean they're probably still, you know, they've got some developers focused on it, but when we zoom out 10 years or look out 10 years, my guess is that the vast majority of advertising revenue will come from services professionals.

A (17:09)

Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds and more, all from a single unified platform. And Interactive Brokers allows you to maximize your returns by minimizing your cost. They offer zero commissions on US Stocks and low commissions on international securities. They aren't cutting corners either. Interactive Brokers, one of a kind. Smart routing technology gets you the lowest price possible in 36 countries and 28 different currencies. Interactive Brokers is our home for stock trading and we wouldn't go anywhere else. If you're getting serious about investing, it's time to upgrade to a broker that you can trust. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC. Okay, let's talk about competition. They're talking about or excuse me, they've changed their business model to more of the services side of things and that has actually changed the competition a bit from as maybe listeners were thinking Google and Apple Maps and maybe majority Google and just Google Search, Google reviews, all of that stuff. Competing with say restaurant reviews to as we're going to get into and I didn't even think about it, competing with the likes of Angie and other services like that. Take us through the competition. When you research this company, how did you look at the competitive space? What are your thoughts and do they have any competitive advantages?

C (18:45)

Yeah, when you think of the original Yelp value proposition. So let's go back to that first example, the local falafel place, writing a good or bad review for that local restaurant. That market has become very, very crowded and frankly, Yelp is losing. So nowadays people are going straight to Google or Apple Maps and looking up food near me and just going through the business pages that way. Or they are finding reviews through social media. Think Instagram, TikTok, Reddit. And actually, I'll say anecdotally, I see my friends do that a lot. You know, they'll find businesses on either some sort of an Instagram video that recommends like top 10, or they'll just look up the name of the restaurant and they can get reviews that way as well. And then the other one is browsing reservation services even so like Open Table or Resi, they'll go through there. And then the last one and the one that's become really sort of a bit of a headwind lately has been the food delivery services like DoorDash and UberEats. So a lot of people are just not going through Yelp anymore when they order food or they want to go to just a pure retail concept. That space is really crowded. I imagine Yelp is going to lose business there over time. On the services side, Yelp still competes against the Internet Giants to some degree. So Apple and Google Maps, depending on what sort of business you're looking up, like if you're just looking up an auto repair shop, there's probably some competition with Apple and Google Maps there, but not nearly as much as they compete with them on the restaurant and retail side. So getting localized content, localized reviews on contractors or service professionals is a lot harder on social media for the most part. So Yelp's primary competition looks like it comes from other marketplaces. So yes, obviously Apple, Google Maps still a threat there, but the. The big ones that they're kind of taking share from are Angie, that's really the big one. And then Thumbtack, which is more VC backed, growing pretty quickly, apparently. I think it's estimated about $400 million in revenue, growing like 20% something year over year. So nothing too crazy, but Thumbtack and Angie, I think are the two big ones there on this side of the business, Yelp strategy seems to be working. So I've got a chart here. It's just Yelp's services advertising revenue versus Angie's. And three years ago, Angie was doing almost $2 billion in revenue. Yelp Services was doing like half a billion, 670 million to be exact. I don't want to throw out too many numbers, but today it's almost equal. So Angie's doing just a billion roughly in revenue, and Yelp services is doing 925 million. So for anyone just listening, just picture two charts converging as they go to the right. Basically, Angie's losing revenue, Yelp is gaining. Classic market share taker situation for Yelp. I think I don't see any reason why this wouldn't continue. And the more reviews that they build out for this professional services side, the more valuable it becomes. Right. There's still a network effect there to some degree. And so I think they continue to drive value for users with reviews, but really drive value for the services professionals as well. So I tried this out the other day. I was trying to look for an oil change and I went to Yelp, saw a business for an oil change, and there's like a request a quote button. For example, I request a quote, and then if you're a business you can subscribe to anytime someone requests like an oil change quote, if you're a competitor, you can send them an email and give a quote as well. So I got like four emails right away with competing offers on the lowest cost oil change. I just filled in my car info, stuff like that. And all of a sudden it's legion for these auto auto shops as well. So there's a lot of value that they're driving specifically with services professionals. And I would guess that they can do well purely just eating Angie's lunch basically makes sense.

A (23:28)

I just did a check right now, starting on Google, as I assume a lot of these do. I looked up good auto repair shops near me. There's some sponsored listings, some Google Maps stuff. But then the first one is 10 auto repair shops in basically the town I live in on Yelp. So I guess they've worked with that strategy. It's done well. My question is, and maybe they talk about this, are they still beholden to the Google ecosystem? And what do you think about the changing landscape of people maybe using OpenAI or Gemini? I guess still a Google product, but a different type, and how that could affect this business? Do you think there's a risk it eventually goes the same way as the restaurant side of things, or is this an entirely different market sector?

C (24:23)

Well, it helps that they have a direct relationship with their customers in some capacity. So there's 30 million unique app users that log on to the Yelp app and can start their search that way. The majority of searches are still from either desktop or mobile web. So, yes, they are still beholden to gold, to Google and other AI players, but that's been the case for 20 years. And they've been able to drive value for service professionals over the. Especially over the last five to ten years, despite Google being the number one driver of demand for them. So I think they've gotten good at playing this SEO game. I mean, you saw it, for example, you just looked up, up, what was it, oil changes near me? Something like that. And you got Yelp. Yelp knows how to surface to the top of those searches, so it is still a risk. Obviously, they don't own their entire customer base, like, at least not as much as, like an Airbnb does, for example. Airbnb. I think the majority of their bookings come directly from the app. That's. That's not the case for Yelp, but it's. It's led. I think it's alleviated that risk a bit by having basically 30 million unique users that use the Yelp app.

A (25:53)

Yeah, one thing I was thinking of is you have Google Maps, the Uber Eats DoorDashes, you have the social media ones. With services a little different, you might have Google reviews as well, but maybe less social media. And you obviously don't have Uber Eats or doordash, since that's restaurant Only with all of. Maybe I'd call it, it's not necessarily fake reviews, but almost paid reviews or getting friends and family to review you even though they're not, you know, an objective customer. I feel like getting, you know, burned by these type of things before, like, oh, Google Maps, high reviews, but it's a terrible product or what have you. Or people just get paid for social media influencers to review stuff and you can't really trust that that much as well, at least from my opinion. I feel like going to Yelp can be maybe more of a trusted source. Is that how they try to play and that's. Is that what your thing is they're positioning in the market after researching them?

C (26:57)

Yeah. I mean this kind of comes back to a topic we talk about all the time on this show, which is focus matters for companies. Google's not going to do that much to manage the review system for businesses on Google Maps or whatever. Yelp, it's critical for their business. So they have a whole bunch of AI automation detection systems that they've put in place over the last 15 years to verify that reviewers are who they say they are, that it's credible that they have been a customer before, that the review itself is helpful. So I tried to like write a review and they make sure that you have like certain criteria in each review and there's always going to be review faking to some degree. I, I think you. There's only so much you can do to avoid that. But Yelps, in my personal experience, seems to be some of the most credible and most reliable reviews of the different aggregators.

A (28:06)

Do you think Yelp has a competitive advantage? If so, why? If no, why not? And how could it change over the next five years?

C (28:17)

Yeah, it's tough. I would not call this a wide moat business, I can say that confidently. But they do have a competitive advantage relative to some of the startups, right, because they have a massive repository of reviews and there's some name notoriety and it's almost like leverage. It's the only leverage that customers have that they can write a Yelp review if the experience isn't great type of thing. And so there's some value in the name and there's some value in the repository of reviews. The thing that I think is unique specifically within the services professional side. When you look at like a restaurant or a retail shop, they all have their own website, they have their own landing page. So Google can dominate there with services professionals. They don't always have that. They, they need someone it's almost like a do it for me or give me just the building blocks to list my services on Yelp directly as opposed to a specific website. So it can be almost a content management system for some of these services professionals as well as a lead generator for them. So that I think is a big differentiator is it doesn't take much to list your business page. Obviously you can do that on Google Maps as well. But I think when it comes to Google, most people are looking for a website, whereas Yelp, you don't need one. But no, I wouldn't say this is a super wide competitive advantage. But within the services category I think it, I think it's a growing one.

A (30:05)

And could they expand it over the next five years and if so, what metrics are you tracking? Just cumulative reviews, number of listings, do they give out any KPI's investors can look at?

C (30:16)

Yeah. The biggest things to know whether the moat is growing within services are services advertising locations. So basically the number of advertisers in the services division or services like reporting segment and then users, Those are the two KPIs you can track. And obviously like if advertising revenue is growing within the services side, that is a function that the it's a result of the marketplace working. So that is the number to track. Ultimately you're not going to have a whole bunch of advertising revenue growth on the services side if it's not working because it's cost per click. So if it's not resulting in customers, the spend will diminish. But if you're seeing user growth and services advertiser growth, that is a sign that that network effect within that specific segment is expanding.

A (31:16)

Let's talk about financials and users. Are they growing, what does the growth look like and what do you think about their future growth prospects from both earnings revenue as well as more people utilizing Yelp services?

C (31:30)

It seems like a simple question, is Yelp growing? But it's not that simple of an answer. So there are some businesses where it's so easy to know whether a company is going to grow in the future. For example, will Costco grow revenue over the next five years? I think everyone would say with almost 100% certainty, yes. Revenue sales across all of corporate Costco or the entire Costco store base will grow. For Yelp, it's not so simple. Their total annual users sank dramatically in 2020. So when Covid hit the people that were visiting yelp dropped like 25%. And it hasn't. Surprisingly, it hasn't really recovered since there Were now there were some changes in how they report. So they wanted to make sure that the number was more accurate, which kind of hurt them on a reporting basis. So like December 2021, or I guess 2021 figures, overall they had 135 million unique users. 2022, they had 125 million. So it looks like they're declining, but that was actually an adjustment in the reporting method. So over the last two to three years, users to the site, and I'm talking about the customer base here, sorry, the user base, not the customer base, I'm talking about individuals, has been growing, which is nice. And I got some third party data from one of the third party data providers, Apptopia, which someone reached out to me from the Apptopia team and they sent me some data. So thank you for doing that. And monthly active users across the app is growing. It's heading in the right direction. I think it was like 6 to 7% annual growth. So on that side of the equation, if you look out seven years, it doesn't look like it's growing. If you look out 12 months, 24 months, things look pretty good. And I guess I'd call it a wash. It's like, is the user base growing? I'd say it's basically flat. And my projections would be Maybe it grows 1 to 2% a year over the next decade. But you're not going to see, I would be very, very surprised if you saw a huge jump in users because look, this has been an Internet asset for 20 years. I think you have a pretty good sense of the size and the draw from customers.

A (34:01)

Are they going usage of the actual mobile app? Because I would feel like you mentioned that Airbnb asset that they have, where people begin their search within the mobile app. If you can get more and more people to join the mobile app, I'd say, and use it obviously as a monthly active user, that would help expand the competitive advantage and reduce that Google risk over the long term.

C (34:24)

Yeah. So there's two different segments that they report. There's mobile web users and then mobile app users. There's about 30 million mobile app users and 40 million mobile web users. Obviously you'd, I think you'd rather have that journey begin on the mobile app, but it doesn't hurt to have both. So, 30 million, Ryan, I'm seeing on.

A (34:47)

Your data here you might have mixed it up. 40 million desktop users. 60 something million.

C (34:54)

Yeah, yeah, mix them up. So 63, 64 million mobile web users. 30 million mobile app users. Desktop is the one that was at like 40 million. But it's first of all, in general, I'd say it's better that the journey is starting on mobile because it's less dominated by Google, although it is still mobile. Web for the time being, remains dominated by Google, but it's easier to get them onto the app that way. Also, and this goes back to the reporting change that they had. There was apparently a lot of people that had like they had the mobile app or there were like engagement farms or bots and stuff that they were detecting and they got to the point where it was making sure that it was true. Engagement on the mobile app is the number that they are actually reporting. So it's engaged users on the mobile app. So this is kind of the bare minimum, I'd say, in terms of maybe people that are visiting the site like it's a true authentic figure, as opposed to some companies that maybe don't go through the effort to find the actual number of people that are people, as opposed to bots, I should say. But yes, more and more towards mobile is great. That that is I think, the goal. But it's basically been flat so far. So I don't know, I'll say, I'd say we'll see. Like, it was at 31 million in 2020, today it's at almost 29 million. So mobile app users, they haven't made that greater progress. But some of that has been the reporting, like I said, the alt data that I was seeing is that 7% MAU growth on the mobile app over the last 12 months. So this is where I said it's a simple question, hardly a simple answer. It's hard to know whether the user side of things is growing. The advertiser side, it's very easy to tell. It is growing and, well, advertising revenue is growing. But there's an interesting dynamic that's going on here. So if you look at retail and restaurant locations, the number of advertisers has just continuously dropped over the last five years. Services advertisers has continuously grown over the last five years. And actually last quarter, for the first time ever, there were more services businesses advertising on Yelp than there were restaurant and retail. But keep in mind, the services are also paying twice as much on average as the restaurant and retail. So at this point it is a much larger business for them. I think over time it's kind of like good company, bad company situation, where over time, as long as the services side continues to grow, it should eventually start to offset any declines from the restaurant and retail. Does that make sense?

A (37:54)

100%. Okay, let's move on to the financials. The profit margin chart you're going to talk about here is, let's say optimistic, but as you're going to go through, they may have even more potential to expand these margins and their goals. Well, maybe an activist, let's say could just be helpful here to get them to accelerate. As you're about to talk about, oh, we're going to drop our SPC as a percentage of revenue by 2 percentage points by 2020 and the goals might be a little bit tepid, but go through the financials, the profit margins, which I would think is the biggest part of the story here as a lower growth business and how you're thinking about it with Building a Financial Model.

C (38:43)

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A (39:35)

All right folks, before we move on, we need to tell you where we get our financial data. Fiscal AI Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts on our podcast and you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including company specific segment and KPI data. That means Amazon AWS revenue, SoFi's total members, Google's paid clicks, growth, and literally millions of more data points. They've also got earnings call transcripts, ownership data, company specific research reports, and much more. If you want complete financial data at your fingertips, then you need to check out fiscal AI. And if you use our link, fiscal AI chitchat you will get 15% off any paid plan. Again, that is fiscal AI slash chitchat. The link will be in the show notes.

C (40:35)

Yeah, Brett mentioned it this for people that are listening. If you're thinking of an operating margin chart, this is one of those beautiful operating margin charts that you want to see where seven years ago operating margins were 2%, today they're 13% and it's just gradually grown. So management seems to have manage their expense base well while still growing revenue in the process. But I'm going to read a quote from the 10K here. Says this was a part of their profitable growth segment that they wrote out. Says operating on a distributed basis has allowed us to reduce our real estate footprint which we expect to continue to benefit margin going forward. As we reduced our reliance on the Bay Area for our hiring needs. We also made significant changes to our compensation mix throughout our organization to emphasize cash over stock. As a result, 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. Second part here we remain disciplined in our allocation of resources. We plan to hold headcount approximately flat in 2025. We also plan to expand the use of AI in our business operations to drive efficiencies reflecting our commitment to driving leverage in the business through our product led strategy. That is music to my ears if I'm a shareholder. I mean that is what you want. Unless you have a business where there's like a massive opportunity and Runway in front of them and they are in that investment stage where you need to be laying out expenses today to attract revenue in the future. This is the situation you want. You can get revenue growth and hopefully zero operating expense growth. It sounds like they're moving devs out of the Bay Area or hiring devs more so out of the Bay Area. They're allowing them to work remote. They're using AI as much as they can in the business and they're moving to cash compensation over stock. That especially, especially at their current valuation is fantastic. You don't want to be giving away stock right now because. And you'll. I'll see what say why in a second here. But the valuation is very attractive. So as much as you can reduce that sbc, I think they could probably accelerate that even more which we'll talk about in a little bit. But yes, I think you should expect GAAP operating margins to expand more and more over the coming years. And the good thing here is that they are using virtually all of their cash flow to buy back shares. So I'm going to go over some of the valuation work real quick.

A (43:25)

I'll share. I'm sharing a shares outstanding chart for the listeners. Not sure. Our recording studio seems to have changed their formatting. I'm not sure why these shared screens are so much smaller. We'll try to fix that on future episodes if people can't see that. But you can look at the shares outstanding chart. Even with a slight bump during 2019 or 2020, if we go from 2017 through the last 12 months, shares outstanding have declined at about a 4% annual rate and it looks like they've accelerated in recent quarters. So pretty good. And that's, hey, if you're taking that cash flow to buy back stock and you still are reducing your shares outstanding while paying a large amount as sbc, and the plan for that is to come down while the valuation as you're going to get into is training less than 10 times earnings. We could go from a 4% annual share count reduction to 6, 8, even 10%. Yeah.

C (44:19)

Over the last 12 months they've reduced by 5.7%. So it is accelerating. Part of that is cash flow is growing and they're paying more towards buybacks. But the other part is valuation continues to come down. So you should expect, I think the buyback yield is at like, let me check this. Keep in mind, buyback yield does not encapsulate stock based compensation, but the buyback Yield is at 13 and a half percent right now.

A (44:46)

Okay. Which is five with that 8% SPC.

C (44:51)

Yeah, I don't think it works out like exactly that way, but about 5 to 6% would be my guess. But let's go back to some assumptions here. Ultimately you can do whatever valuation work you want. And I'm sure there are people at small cap investment shops looking at this thing that are going to be much more precise than I am. But whether or not Yelp ends up being a successful investment is going to come down to the success of the services business, if that business grows. Because keep in mind they're a higher paying customer and it's a decent sized market for them to go after. The stock is going to be cheap any way you slice it. But if that business declines and the restaurant and retail business declines, then we've got a totally different story. But here's sort of how I think about things. These are the questions that if you're seriously looking to Yelp. I think you need to ask yourself how many advertising locations will there be in the future, how many users will there be in the future and what will the cost per click be? Those are, here's my answers. I think you're going to see declines in restaurant and retail advertisers. You're already seeing that, so it should continue. But eventually that'll be offset by services advertiser growth. Second answer, how many users will there be in the future? I think users will continue to grow gradually, especially as they keep building out this bigger and bigger repository of reviews for services professionals specifically. Maybe it declines like total users, maybe it continues to like if you just look at the top level figure it might decline for because of the restaurant and retail pressure and people that are going to doordash instead of going to Yelp kind of thing. But users going for services professionals listings, like users that are looking for that specific service. I suspect that will grow. My estimate is two and a half percent a year. But honestly the answer is I don't know. I suspect it'll be flat to slight growth. The last question is how, what will the cost per click look like as advertisers shift more towards services? I think the cost per click is going to continue. It has grown by 8% a year over the last five years. I think 7 to 8% is gonna continue because I would gladly, gladly pay a hundred dollars a month if I'm a, let's say, I don't know, carpenter or a plumber or something. I'll gladly pay a hundred dollars a month for new leads because I'm going to be collecting thousands in in those leads. It's way higher ticket, way more value. So I suspect that cost per click is going to continue to rise. And then my last projection is I think they can go from 13% operating margins today to 18% by 2030. Might be a little aggressive, but directionally I think it's going to be right.

A (48:10)

Well, I'm seeing on looked up fiscal while you were talking here, 90% gross margins. This is a question I'm going to ask you, but this is what I would ask management if I was an activist or a big shareholder that got to talk to them. Why can't this be a 40% operating margin business? What's stopping them?

C (48:30)

Yeah, I think that's a fair question. I think they just have plans to get there much slower than what shareholders would probably want. But let's just play off my assumptions here. So the assumptions I had is basically the financial equivalent of their Services business is successful. If that happens, I think they'll be generating more than $400 million in operating income in 2030. Right now they have a $1.6 billion enterprise value. So that'd be four times 2030 operating income. But that doesn't even factor in the buyback. They trade at a current so enterprise value 1.6 billion divided by last 12 months earnings before interest and taxes is 8.9 times. So if they are successful with the services business expansion, it's going to be a huge success. And when you factor in the buyback, either one of two things is going to happen. Either they are going to be one of the best share cannibals of the next decade. Like let's say the stock price didn't change and the services business grew. They're just going to swallow up shares and maybe be like one of those phenomenal share cannibals. Or they're going to get a RE rating in the stock. One of two things has to happen in that situation. If the services business is successful, is as successful as I think it'll be.

A (50:01)

Okay, no follow ups. What's next?

C (50:05)

Well, management.

A (50:06)

Okay, all right. No more evaluation.

C (50:10)

No, no, I don't want to pour over numbers too much on this podcast. It is cheap. It's less than nine times operating income, trailing, and they are expanding margins rapidly. So.

A (50:23)

All right, there we go. So let's talk management. The question we like to ask before making an investment in a company, especially if our time horizon typically is three to five years for most of the type of investments we're making, if not longer, we like to ask, do I trust the management team to take care of shareholders? Not just shareholders. You know, they got to care about everyone within their ecosystem, all the stakeholders. But who runs Yelp and Ryan, after researching, do you trust them?

C (50:56)

So Jeremy Stoppelman is still the CEO. The co founder from 20 years ago, 21 years ago, is still the CEO today. I think he's done a good job navigating the business towards services and he seems to finally be coming to the realization that Yelp can simultaneously increase profit margins and still grow revenue at the same time. So that that is good. He seems to have found religion on that front. However, as I was reading the proxy, I just found myself getting more and more annoyed. And I'll go through why. So, like most companies you look at, Yelp's management team has a base salary, annual cash incentives, and then performance based stock bonuses. So restricted stock units, the performance based, restricted stock units come down to Two factors. One, revenue and adjusted EBITDA targets, which I don't love adjusted EBITDA targets, but whatever. This is very common with a lot of businesses, especially tech businesses. So revenue and adjusted EBITDA targets. The second one is relative performance versus their peer group on a trailing three year basis. Now, I really don't love relative return based compensation hurdles. However, I was thinking, okay, well, their stock has sucked, so it's not like they're getting paid out for it. I was wrong. Their stock, which is flat over the last 10 years, it's flat. And over the last three years it was down 8% last I checked. Somehow, despite the stock going down, over the last three years, they earned 50% of their target compensation for their relative return.

A (52:43)

Well, when your competitor is Angie, their peer group sucked.

C (52:48)

I looked at them. It's horrible. And I. Apparently it's based on industry, which makes sense, I guess, if you're doing a peer group relative return, although I don't think you need that in the first place. And then market cap thresholds. Why does there need to be a market cap threshold for your relative return? As an investor, I'm not deciding between you and Angie, I'm deciding between you and Google.

A (53:14)

And relative return just ban it doesn't kill an investment. But it is frustrating to see. And this as you're going through looks like a very frustrating proxy statement.

C (53:28)

Yeah. And as a company does well, like say they're in your peer group and they perform well, so their market cap rises, you can just kick them out of your peer group. Oh, I don't have to worry about them anymore. I can still hit my return hurdles. Thank God we could remove them. So that part was disappointing. But here's what really, really upset me. Why is the co founder and CEO who owns 6.3% of the company taking an extra $10 million in annual compensation in stock?

A (54:02)

That's a good way to raise margin right there. That could raise it by half a percentage point. Maybe we got rid of that.

C (54:08)

Yeah. That is so dumb. Like he could just reap the benefits from the share price increasing. He owns 6.3% of the company.

A (54:15)

If you need cash, pay a small dividend.

C (54:18)

I put here. The greatest trick that McKinsey ever pulled was convincing the world that compensation consultants are good for shareholders. This is. I don't Even know if McKinsey is the consultant here, but.

A (54:32)

Well, it's just. Yeah. That industry. Yeah. Well, it is what it is. If anyone, it gets frustrated when researching companies that seem like interesting investments and then look at the proxy statement and ha make you and. And it makes you hesitant. There's a book out there called when McKinsey comes to town, I believe, and I recommend reading that. It's a nice. Well, you also get frustrated reading it, but maybe it'll make you sleep better at night knowing that you don't act as sometimes they did. Back to Yelp, though. Do you think Yelp can beat the market? Are you thinking of buying shares? Is this a watch list? Stock psychological short, psychological long. What are you going to be buying shares? What are your final thoughts here, Ryan?

C (55:26)

Okay, despite the disappointments with the proxy statement, I am still very compelled by the valuation. I think I'm gonna buy some shares. It's gonna be a starter position. And the two metrics I'm tracking to raise my. The thing I am monitoring to potentially raise my position sizing is am I right about the services business? Because if they have a unique method of approaching a valuable customer group, this could be a much bigger business. And you're going to get the benefit of revenue growth plus operating margin expansion, plus either multiple RE rating or huge stock buybacks, which is a recipe for great returns.

A (56:13)

Right. And keep that going to help not only with that upside, but with the downside protection as well. I mean, right now, like, is this the best business in the world? No. But you're at 14 times pe evid to 7 ev to gross profit 1.3. So those operating margins keep expanding. You know, that gross profit number is going to matter more and more and can just, you know, show up in the earnings. You probably do. Okay. Even if, as you mentioned here, the services business starts stagnating, going backwards with the stock fall maybe 20% from here. Yeah. But it looks like people are pricing in that this business is dying.

C (56:51)

Yeah. If this was the best business in the world, it wouldn't trade it 8 times earnings or 9 times earnings.

A (56:57)

So a sprouts farmers market traded at 8 times earnings. No, that's not.

C (57:03)

But that's one that.

A (57:04)

Yeah, it was a turnaround.

C (57:05)

It improved too.

A (57:06)

Right.

C (57:07)

So this as much as it's like still the same management team, it could. It's sort of a turnaround in a way because it's a different business like customer base. So I do think in a best case scenario, you get the financial growth of services business growing, but it could turn into a really differentiated digital asset for where like that marketplace expands, that network effect expands and everything Angie wanted to be Yelp could be and they can, you know, I'm kind of going Galaxy Brain here. But you could start to layer on some bookings on the platform and kind of layering in or integrating commerce into it beyond just advertising because you can already do a lot in the app and I want to keep kind of exploring it. But I think if they can really, really build out that marketplace, you've got a phenomenal return here. And 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 with the services professionals and users grow with it, especially the users that matter, then it could turn into one where it becomes sort of more of a never sell.

A (58:25)

Yeah, I kind of think about them as they're playing defense a little bit today. They could go on offense in the future. And you're kind of looking at it as a almost buying third strategy where you put a starter position today. They keep proving themselves. Six months from now you might buy a little more even if the Stock is like 50% higher or something like that. But 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.

C (59:00)

Yeah, I think that's a fair way to put it. What other shows do we have coming up?

A (59:06)

Okay. Yeah, thank you, Ryan. We have some interviews with, and this is without any particular order, Michael Fritzel from Asian Century Stocks talking investing in Asia and Fairfax India. We have a John Rotanti episode coming in November, a bit of an evergreen episode on Investing Checklist. We're going to have Reheard Jark returning to the show to talk and he's one of the foremost experts, I think, overlapping with tech, AI and investing in the mega cap technology companies. One of the sharpest investors of that. We're going to be talking big tech and kind of all the chaos surrounding AI. And we're going to have Dave Ahern from Investing for Beginners talking new holdings slash new banks. A lot of fun interviews. We're also going to be doing a even though and we'll do an official post to help people put some questions in. We're going to be doing a long form AMA episode in place of one of the live power hours since Ryan and I will both be off for one week, so look out for that. But a lot of fun stuff coming down the line. And as always, we're going to be doing the investing power hours every week. Thank you to the listeners for this one. Hope you got, you know, something out of this episode, learn a bit about Yelp's business and potentially, you know, do your own research. Obviously buy or sell whatever you want, but hopefully you got some insights on the potential investment. As a disclosure, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone once again, and we'll see you next time.