Let me start off by saying that I got my behind kicked when Angie's List (ANGI) reported its Q4:12 results in the middle of February 2013 since I was long puts on the company which needless to say expired worthless thereafter. ANGI managed to report a "profit" of $0.04/share versus Street estimates of a loss of $0.02/share. Having said that, I was also along for the darkside (short) trade in Q3 of last year when the shares went from $17 or so to $9 and change.
I first became aware of Angie's List when I started seeing the constant bombardment of its advertisements on television a few months before it came public. Its ads were everywhere and seemed to air constantly. I figured it was getting ready to go public and were trying to drum up a buzz about the company. Nothing wrong with that.
Sure enough, on November 17, 2011, Angie's List went public pricing 8.8 million shares (about 16.2% of its outstanding stock) at $13/share, the top of its proposed range. The stock ended that day at $16.26/share for a gain on debut of 25%. Not shabby at all.
ANGI will report Q1:13 numbers on April 22, 2013. Current Street estimates call for a loss of $0.17/share for Q1 on revenues of $51.60 million. For FY:13, current sell-side consensus is a loss of $0.49/share on revenues of $240 million. Can you say lowball? These absurdly low hurdles will allow the company to beat and raise forward estimates thereby justifying the buy ratings on the stock at present by the sell-side.
So why see/short it you ask? Here we go:
The company has $38 million in cash (net of debt) at present. If the Street numbers are accurate (which they are not-lowball), the company will lose about $30 million this year based on approximately 60 million shares outstanding at the end of the year (my estimates which include stock based compensation and stock grants). That leaves Angie's List with about $8 million in cash. Not a very reassuring thought, is it?
So what happens, next you ask? Well, the company will definitely need to raise cash well before the year is up which is where Wall Street comes in. It's a game that has been played on Wall Street for eons and through booms and busts. Keeps the cash registers ringing for the underwriting firms. Which explains the 10 buys and strong buys on the company, five holds and zero sells. Let's assume the company tries and raises another $100 million in a secondary. At current price levels it will only have to issue about 5 to 5.5 million shares for a dilution of barely 10%. Not a bad deal, no? Currently, the mean target is $21/share with a low/high range of $16/share and $25/share. The nea- certainty of a secondary and the subsequent fees to be earned by the underwriting firms goes a long way in explaining why not a single sell-sider thinks the company is a sell or a short at current levels.
ANGI lists Google (GOOG) and Yelp (YELP) as its competition. Competing with Google is almost impossible as it offers far better integration for advertisers into its AdWords product offering. Google also does not need to spend too much money on promoting its AdWords compared to the amount of money Angie's List has to. From the 2012 10k, the company spent $74 in marketing costs for each new member it added.
In addition, Angie's List offers massive discounts to induce new subscribers to sign up for its services, up to 50% in general. That is a totally losing proposition and a terrible model going forward, any way you look at it. The company's churn rate, for existing customers, on an annual basis is around 26% which is a total disaster.
Angie's List promotes itself as an independent review site with very little interaction with the companies that are listed on their web pages. However, if one were to dig through the 10k, you will find that the company took in almost $133 million in advertising revenue from the businesses listed on the site. Not the sort of independence I am looking for. How about you?
Anecdotally, I have also heard from several ex-subscribers that say they only signed up for the company's monthly membership when they were required to look up the reviews for a specific situation, after which they were free to cancel the following month. Let's say for instance I am in need of plumbing services and I can't find the information for free on the internet (I am a dummy), so I sign on for a monthly membership on the company's website. I go through the reviews of all the plumbers in my area pick one and get my work completed. Why would I continue the following month even if I had money to burn?
Finally, it's impossible to ignore the turnover the management team has seen since it went public. The most recent departure of the CFO, Robert Millard sent alarm bells ringing in my head and they should for you as well although the company and Millard himself said all the usual and customary niceties in the press release. This departure is one of many departures soon after the company went public. In April of 2012, COO, Scott Brenton resigned as well a handful of months after the company went public. Both resignations could turn out to be non-events after all is said and done but red flags are up for sure.
As with anything there is always a flip side. The flip side to selling/shorting at current levels are as follows:
A secondary is a sure thing and the company is in desperate need for cash. Wall Street will only be too happy to oblige, so the Buy ratings will continue as will the lowball estimates so as to allow the company to play the "beat and raise" game going forward. This will also allow the company to raise much needed cash and allow the underwriters to raise money in the form of fees and commissions.
At present, there are 8.3 million shares short or about 15.4% of the float which could lead to one heckuva squeeze if the company continues bamboozling us with its "beat and raise" thanks to an extremely cooperative sell-side community. The current days to cover ratio (based on average trading volumes for the last 10 days) is also very high at 10.5 days.
As always, do your own research and draw your own conclusions about Angie's List, but I have made my position clear and my money is definitely where my mouth is.
Until the next time, safe investing.
Additional disclosure: Long ANGI puts, long GOOG calls, short GOOG weeklies, no positions in YELP