(This article is a follow-up to my earlier article analyzing Angie's List's business model and financial problems.)
According its website:
- "Companies can't pay to be on Angie's List"
- "Reviews come from real people like you"
(Source: ANGI website downloaded 2/13/2013)
ANGI had a profits announcement today which was very upbeat. However, there are some serious problems.
Before discussing, it's worth taking a look at Angie's List's 2012 Annual Report Press Release and Current Report 8-K. Angie's List has not yet filed a 10-K for 2012, but quarterly and annual numbers are stated in the "Current Report".
President Bill Oesterle summarizes it by saying "As I hope you can see in our press release, we had a very good quarter. Even more importantly, we had an outstanding 2012. We achieved new records for total revenue, total membership, and total service provider contract value. We accomplished all of this while simultaneously reducing our cost of acquisition and improving our margins."
(Source: Angie's List, Inc. Q4 2012 Earnings Call)
The annual report confirms this good news. Instead of losing money as in the past, ANGI made 4 cents a share profits. Revenue, especially revenue from advertisers, ("service providers") is up quite a bit. There is much to like here.
Four cents a share profit does not justify the current price. If you give ANGI the same P/E ratio as Apple (AAPL), which is 9, then the stock ought to be worth 36 cents, not $16.00.
But 4 cents per share profit is not an annual number. The annual number for the most recent year is a $45 million loss, almost a dollar a share. And theA business needs to make profits all year long, not just one quarter in four. Angie's list won't be reporting a profit to the IRS. The annual numbers seem a more reliable measure of the health of the business. (source: Angie's List 2012 Condensed Consolidated Statements of Operations)
And what of the claim that its reviews are unbiased because Angie's List doesn't take any advertising? According to the report, advertising is more than half of revenue, and rising. Specifically, "Service Provider" revenue of $108 million represents advertising, while "Membership" revenue is $47 million. If revenue figures are any measure, then Angie's List answers to advertisers, not members. Which is not unusual, most publications and websites depend on advertising. It's the apparent contradiction to its basic philosophy, and the patent falseness of the claims made to members that are troubling.
Remember the ballplayer in Jerry Maguire who keeps yelling "Show Me The Money"? Well that's the ugly problem here.
If you read its financial report, it appears that ANGI's net worth went down from 88 million cash on hand at the end of 2011, to $42 million cash on hand at the end of 2012, with no other assets of significant value. Hand in hand with this goes a 2012 net loss of $52 million, up from $49 million in 2011.
The $42 million cash on hand includes 9 million through additional stock sales. So, despite the claims of "profits" ANGI seems to be down more than $50 million for the year, no two ways about it.
So to put it another way, it asked investors for $88 million last year, blew most of it, and what it has to show for the effort is 4 cents a share profit over a two year period, which appears to have cost something like $8 a share to generate.
Somewhere lost in all of this are some numbers that don't totally add up. The original IPO price of the stock was $13 last year. There are 58 million shares. If each share contributed $13 there ought to be $674 million in a bank account somewhere, but in fact, there is only $42 million and no other real assets to speak of.
One reason is dilution, because many shares were issued at minimal or no cost to company insiders.
The bottom line is that if you invest $13 in a company's public offering, you should expect it to build $13 worth of a business, and that's not happening here. If you invested $13 at the IPO, by this point that has been diluted and spent down to less than a dollar. It's simple math. 57 million shares, 42 million dollars = 73 cents a share.
But ANGI made 4 cents profit.
The value that belongs to stockholders, which means assets minus the debts that have to be paid, is shareholder equity. This includes all assets, not just cash. This dropped from $45 million in December 2011 to $5.3 million in December 2012. That's 9.2 cents per share. That's what is left after you pay the debts. (source: Form 8-K Condensed Consolidated Balance Sheets)
Time to impact
At the current rate of cash burn, about 12 million a quarter, ANGI will be out of business in less than a year. Do the math: $52 million lost last year, and $42 million in the bank. ANGI will need to sell some stock or sell the business.
And before it can sell the business, it's going to have to use some creative accounting to make it look like it's making money.
I'm not saying Angie's List is an unsalvageable business. It can cut expenses, stop spending so much money trying to get consumers to pay to sign up, and try to focus on making a profit. It has a site and it has some customers, it's a pretty good start. But the basic concept of a paid website that claims to have no advertisers is a bad one. And its simply not true. It will have to change this before it can really succeed.
At the end of the day, I just don't trust the people who run this company. That's why I have such a negative take on their exaggerated claims of financial viability. Right now, by promising no ads ("You can't pay to be on Angie's List") but depending on advertising for more than half of their revenue, this company is a big lie. If they lie about one thing they will lie about another. Consumers are bound to figure it out, and when they do, investors will be holding worthless shares of a big nothing.
Additional disclosure: I have taken an investment position that is consistent with the views expressed in this article.