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**Yelp Valuation**
## Introduction
Yelp Inc. (YELP) is an American company that develops the [Yelp.com](http://Yelp.com) website and mobile app. The company was founded 21 years ago in 2004 and is located in San Francisco. Yelp is one of the leading sources for user-generated reviews of restaurants and businesses and their main revenue source is advertising. I have been following this company for only about a month. As a disclaimer: I do hold stock in this company and this is not investment advice. As with my last valuation, I'll try to focus on the numbers as much as possible, with the bulk being a DCF analysis.
## DCF Analysis and Numbers
All the numbers for this DCF analysis have been taken straight from Yahoo Finance as of February 17th 2026.
Number of shares outstanding: 63.06 million
Current share price: 20.98
Discount rate: 10% (I'm using 10% as my required rate of return here - the average return of the S&P 500 over time.)
Growth rate: 0% (Initially assuming zero growth in this company in the future. This could potentially be negative if Yelp loses business to AI growth or other avenues. For reference, historical growth rate over the past five years averages 15% per year.)
Perpetuity growth rate: 2% (Long-term growth rate of United States GDP estimated to be between 2 - 3%.)
Free cash flow:
1. TTM (323,676,000)
2. 2024 (248,468,000)
3. 2023 (279,433,000)
4. 2022 (160,330,000)
5. 2021 (184,373,000)
Now we use these numbers to discount the future cash flows back to present value. I am once again going to use the average of the past five years (239,256,000) rather than the trailing twelve month value to be more conservative.
Discounted cash flow:
1. Year 1 (217,505,454)
2. Year 2 (197,732,231)
3. Year 3 (179,756,574)
4. Year 4 (163,415,067)
5. Year 5 (148,559,152)
Now we are going to calculate a terminal value for the value of the entire company after this five year forecast period. The terminal value then needs to be discounted back to present value.
Terminal Value (1,894,129,188)
Discounted Terminal Value (1,176,105,202)
With these values we can now get to a conservative estimate of the per share value for the company. Adding up the discounted cash flows for years 1 - 5 yields: 906,968,479. We then add the discounted terminal value to get: 2,083,073,681. Now we can simply divide the total value of the company by the number of outstanding shares to get a per share value of 33.03. If we wanted to buy Yelp at around 70% of its intrinsic value that would be 23.12 per share. Based on the current price of Yelp and this conservative estimate of per share value, the upside is around 50% or more. There is a little more to the story though, as Yelp holds a significant amount of cash. Their total cash on the balance sheet is 319.35 million for the most recent quarter. However, their debt is only 24.88 million. This leaves net cash at 294.47 million. If we divide this by the outstanding number of shares we reach a per-share cash value of 4.67. This means we are essentially getting a discount of 4.67 on the purchase price of 20.98.
### Risks and Potential Downside
So what are the risks to this story and why is Yelp trading at what seems to be a significant discount? The major threat looming over Yelp at the moment is the potential for disruption by artificial intelligence large language models such as Google Gemini, Chat GPT, etc. Yelp's main source of revenue is through business advertising. If this dries up due to a decreasing user base or decreased traffic due to AI disruption it will cause a decline in Yelp's future cash flow. If we refer to our DCF model but rather than assuming a 0% growth rate we factor in a negative 5% growth rate per year, what does it look like? In this case our intrinsic value per share comes in at 31.38, with a 30% margin of safety being 21.97. So even with cash flow declining at 5% per year, Yelp still looks like a serious discount at current prices.
What performance metrics can we look at to get a deeper sense of their user base? One interesting piece of the puzzle is that their total ad clicks have decreased 7% year over year. This is attributed to lower consumer spending due to economic uncertainties. However, their cost per click has actually increased by 10% year over year, reflecting growth in their higher cost services category. They also report record revenue growth from other categories, increasing 17% year over year to 74 million. This category includes subscription products and data licensing, importantly including agreements with AI search providers and food delivery through a partnership with DoorDash. They also report total number of cumulative review growth of 7% from 2024. This compares with their app unique devices metric which reports a decrease of 2%. This measures the number of unique mobile devices using the app in a given month. If we look at another reported performance metric, desktop unique devices, we see growth of around 0.5%. This is the number of unique devices that visit the desktop and mobile website each month.
### Final Thoughts
So is Yelp a good value or is it a value trap? Given the current price, it is hard to see how Yelp could be a bad purchase. It is trading at a significant discount to its intrinsic value even given all of the conservative measures taken during the DCF analysis. The business will have to completely dry up over time for this to be a bad investment. If they can maintain their current user base and continue to generate unique reviews on their platform, it should translate into a win for the company. Even with increasing AI adoption, there will still be a need for the human element to generate restaurant and business reviews (as Gemini has told me, "An AI can't eat a taco"). This is evident by the fact that other companies are willing to purchase their large bank of reviews and ratings. I think some key categories to watch in the future will be their cumulative review growth as well as the number of unique devices using the platform. If both of these start to decline it may signal that consumers are moving away from the company.