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Our more detailed report analysis is available, but the Angie's List summary is as follows:

Thesis Overview:

We believe that Angie's List (ANGI) is overvalued at its current levels and has a number of competitive, financial and conflicts of interest issues that will cause the stock to materially underperform.

  1. There is a high probability of the company having to do an equity raise due to liquidity issues in the coming fiscal year
    • Current cash burn is $20 million per quarter
    • Funding cashflow through working capital (negative $58 million at end of 3Q)
    • Current liquidity position of $80 million
  2. We believe the company and the analyst community have overstated the company's addressable market and profitability measures
  3. There is growing discontent among the company's membership and service providers due to sketchy renewal and pricing practices
  4. Competition is heating up as the big internet players turn their focus on local advertising spend
    • Network effect / sample size of free reviews lends credibility to the forum
  5. The current stock price is pricing in unrealistic:
    • Level of penetration in the company's stated market size
    • Efficiency re: the company's marketing spend
    • Positive momentum re: customer churn vs. historic levels

Company Overview:

Angie's List is a leading provider of reviews for "high cost of failure" consumer services like home repairs, health services and car repair. It earns revenue from two separate streams:

  • Membership fees paid either monthly, annually or in multi-year contracts and the customer can either choose to buy a specific vertical or a bundle
  • Advertising revenue from service providers who pay to be featured prominently on the website. The company says it only allows services providers with its highest two ratings designation to advertise on the site

Angie's List typical member is 35 - 64, is married, college educated and has an annual household income of over $100,000. This parameter gives the company a total available market of 24 million homes (out of 120 million U.S households). Some additional stats:

  • The company is currently in 186 paying markets
  • 500,000 engaged service companies
  • ~30,000 paying service providers

Market Overview:

Angie's List is a relatively new business operating in a mature market - connecting consumers with service providers. It competes primarily with four categories of businesses

  • Directories or "Yellow Pages" are localized directories of all businesses in a given area. A company can choose to advertise in a targeted section. These businesses have both a physical and internet business
  • Free reviews sites such as Yelp, Facebook, Google Places etc. which allow customers to post reviews of businesses for free and local businesses to advertise to customers
  • Lead generation businesses such as ServiceMagic (owned by IAC) which generate leads for merchants / service providers (i.e. I need a painter and the service provides me with 4 options)
  • Paid membership like Angie's List which combines the reviews and lead generation (somewhat) but states that the paywall makes a difference in the quality of reviews

Price Target:

Our price target for ANGI is $6.00 which is based off a DCF-valuation. Key assumptions include:

  • The company penetrates 34% of its existing TAM (double the penetration in Indianapolis)
  • Churn rate moderates from 39% to 34% in the exit year
  • CPAs improve from $71 to $52
  • Terminal value based on 10% FCF yield
  • 12% weighted average cost of capital

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: 5 Pillars To Angie's List Demise