Yelp's Q2 Earnings: A Strategic Re-Rating in the Age of AI-Driven Local Search

Yelp Inc. (YELP) has long been a bellwether for the on-demand economy, but its Q2 2025 earnings report signals a pivotal shift in its competitive positioning. With net revenue of $370 million—a 4% year-over-year increase and a 1.4% beat on Wall Street estimates—the company has navigated macroeconomic headwinds while outperforming peers in a slowing ad market. Yet the question remains: Does Yelp's strategic pivot toward AI-driven tools, margin discipline, and high-margin services justify a re-rating of its valuation?

The Competitive Landscape: Yelp's Niche in a Google-Dominated World

Google's dominance in digital advertising and local search remains unchallenged, with 73% of the review platform market share and 57–58% of all online reviews. Yelp, at 45.18%, holds a secondary but critical position, particularly in high-intent categories like restaurants and services. While Google's scale and integration with its advertising ecosystem give it an edge, Yelp's strength lies in its ability to capture users actively seeking local services. This is where its recent AI initiatives—such as Yelp Assistant and Yelp Host—are reshaping the value proposition.

Yelp Assistant, an AI-powered tool for businesses to manage customer interactions, has seen project submissions surge by 400% YoY. Meanwhile, Yelp Host, a call-answering service for restaurants, is in live testing, addressing a pain point for small businesses. These tools not only enhance user experience but also improve advertiser ROI by generating higher-quality leads. In a market where 88% of consumers read reviews before choosing a business, Yelp's AI-driven personalization could bridge the gap between Google's breadth and Yelp's depth.

Margin Improvements and Strategic Discipline

Yelp's Q2 results highlight disciplined cost management and margin expansion. Net income rose 16% YoY to $44 million, with a 12% net margin and a 27% adjusted EBITDA margin—up 2 percentage points from the prior year. These improvements stem from tighter control over sales and marketing costs (down to 10% of revenue from 12%) and a shift toward high-margin services. The Services segment, which includes RepairPal (acquired for $80 million in 2024), grew 14% YoY in Q1 2025, reflecting Yelp's pivot away from declining restaurant and retail categories.

The company's capital allocation strategy further strengthens its case. In H1 2025, Yelp repurchased $128 million of shares at $35.58 average, leveraging its $197 million cash reserves. With a forward P/E of 9.28 and a PEG ratio of 0.72, the stock appears undervalued relative to its earnings growth. Analysts project a $34 price target, just 0.53% below the current price, with a “Hold” consensus.

Re-Rating Catalysts: AI and Data Licensing

Yelp's AI initiatives are not just incremental—they're transformative. The 10x surge in API usage for AI search and $10 million run rate in data licensing revenue underscore its potential to monetize AI beyond advertising. By licensing its data to third-party platforms, Yelp is diversifying revenue streams and positioning itself as a key player in the AI infrastructure layer. This aligns with broader industry trends, as AI adoption in local search accelerates.

However, challenges persist. The Restaurant, Retail, and Other (RR&O) segment declined 5% YoY, reflecting broader economic pressures. Yelp's revised 2025 guidance—$1.465B–$1.475B revenue and $350M–$360M EBITDA—acknowledges these headwinds but also signals confidence in its ability to offset them with Services growth.

Valuation Justification and Investment Thesis

Yelp's valuation metrics are compelling. A PEG ratio of 0.72 suggests the stock is undervalued relative to its earnings growth, while its 20.13% ROE and 15.03% ROIC highlight efficient capital use. The company's Free Cash Flow of $132.5 million in H1 2025 (up 37% YoY) provides flexibility for further innovation and shareholder returns.

For investors, Yelp represents a unique opportunity: a high-margin, AI-first local search platform with a defensible moat in high-intent categories. While Google's scale is unmatched, Yelp's focus on niche verticals and AI-driven efficiency could enable it to capture a larger share of the $1.475 billion revenue target.

Conclusion: A Re-Rating in the Making

Yelp's Q2 results and strategic pivot justify a re-rating. The company's margin improvements, AI-led innovation, and disciplined capital allocation position it to outperform in a recovering on-demand economy. While risks like macroeconomic volatility and competitive pressures remain, Yelp's focus on high-margin services and data licensing creates a compelling long-term story. For investors seeking exposure to a rebounding local advertising sector, Yelp offers a balanced mix of growth and value—provided they're willing to bet on its ability to execute its AI-driven vision.

Investment Recommendation: Buy for long-term growth, with a focus on Yelp's AI monetization and Services segment expansion. Monitor macroeconomic trends and competitor moves in Q3 2025.