In the late 1990s it was the dot-com stocks, today the craze is in social media stocks -- or "new age companies" as many call them. One of the newest members of this new age of super-bubble stocks is Angie's List (ANGI).
Angie's List is a members-only site for business reviews. Contrary to other sites like Yelp (YELP) and TripAdvisor (TRIP), Angie's List only accepts reviews from paid members. This leaves very little room for the possibility -- as the company states -- of fake reviews. On top of that, all reviews are certified. The idea behind Angie's List is sound and indeed it differentiates from other similar sites in many ways. However, a nice idea is one thing, and a sustainable business model is another.
As per the company's latest quarter, the company had an operational loss of $7.95 million, or $0.14 per diluted share. Revenues were up 68% to $52.2 million and paid memberships were up 60% year over year (currently over two million), while the cost-per-acquisition was down 12% (the real bright spot in the report).
The Problem With the Business Model
Subscriber revenue was up 47% year over year to $14.6 million, while service provider revenue was up 78% over the same period. The problem by default -- as I see it -- is that service revenue was higher than subscription revenue. You see, the company is currently spending a lot of money on subscriber acquisition and then hopes to make money from service providers who advertise to get business on Angie's List, provided they have good ratings by subscribers.
But there is a limit to how much service provider revenue can increase relevant to subscriber revenue. Service provider revenue can theoretically increase faster than subscriber revenue, but not forever. There will come a time when service providers will not make much money and will eventually advertise less to get business because there will be great competition among them. That will then lower service provider revenue growth in the future. If, however, subscriber revenue was more than service provider revenue (and that is not the case), then it would never be an issue.
Click to enlarge images.
As the data and the chart above show, subscriber/service revenue has been declining over the past several quarters. As I understand, the business model of the company can be sustainable forever, as long as the opposite is true. Meaning that subscriber revenue is rising faster than service revenue. Like I said, there will come a time when the available pool of subscribers will not be enough for service providers.
The table above depicts subscriber and service revenue growth on a quarter-over-quarter basis. As the data above shows, growth is slowing. And while year-over-year growth overall is still very impressive, on a quarter-over-quarter basis, things are slowing down.
One of the reasons why growth might slow down even more in the future has to do with the company's cash position. The company spends a lot of money to acquire both subscribers and service revenue partners. The more it spends, the more subscribers and service partners it acquires. The company has never really made any money and has relied on selling stock for its liquidity position. It has sold stock to the market two times. Once in its IPO in November 2011 and the second time a few months later in May 2012. Since then, its cash position has been deteriorating.
As such, the question is: Will the company run out of cash before it has a chance to become profitable and therefore stabilize its cash position? Or will it be turning to the market for cash, something that will dilute shareholders once again? Answering these questions is not easy. Indeed, the company has been spending less to acquire revenue, but I am not so sure it will continue to spend less going forward. One of the reasons for this is that it's not the only company in this business anymore. San Francisco-based start-up Thumbtack.com is also in the same business as Angie's List. After reading a post on the company's business model by fellow Seeking Alpha writer Charles Patton, I think Angie's List will face some stiff competition very soon.
The chart below depicts the company's operating and profit margins. While things have been getting better and the company is fine-tuning its model every quarter, my question is: When will they ever make any money? As per management's guidance, that is not going to happen anytime soon.
Another thing that I find very interesting is the company's balance sheet.
As you can see from the chart above, current liabilities are approaching current assets. This means the company does not have much leeway as far as working capital in concerned. Granted that about two-thirds of these current liabilities are deferred membership and advertising revenue, but a liability is a liability -- even if it does not mean you might not face liquidity problems as a result.
But besides the fact that company has little or no working capital on its balance sheet left, it also has no shareholder equity. As the chart above shows, shareholders equity has been coming down and is now in negative territory.
I generally don't believe in conspiracy theories, so I will not say that this is a pumped-up stock. It might just be, but I do not have any conspiracy proof to be able to say it is. But while the market might be right about this company's valuation, there is another side to the market we have to take into account. That other side of the market are the strategic short-seller folks.
As you can see from the data above, the amount of Angie's List shares sold short are at record high levels. And the only reason short interest is not double the current number is that a lot of them probably had to cover and have probably pushed the stock up all by themselves, only to open up short positions at higher levels. Having said that, however, and since the stock closed at record high levels on Friday, 100% of those who have shorted this stock are so far in the red. However, since I have the highest respect for strategic short sellers, I think they have studied this business model very closely and have come to same conclusion as me.
And the conclusion is that the business model long term is probably not sustainable. But even if it is, is this stock worth the current price? My answer as far as the second question is no, this stock is not worth it. Any stock that has a negative equity position, with little or no working capital, that has never made a dime, burns cash faster than it can raise it on the open market, and sells for eight times sales is not worth it. It's as simple as that. So is this stock a short candidate? Absolutely. As far as fundamental analysis goes, it really does not get any better than this if you are a short seller.
However, this stock, like many other new-age stocks such as Workday (WDAY) and Salesforce (CRM), don't abide by the classic fundamental laws of stocks as we know them. So in order to short this stock, you first have to get confirmation of technical weakness on the charts. Only then do I recommend shorting this stock and under no other circumstances.
One other way to play this one is to sell long-term out-of-the-money calls. I don't know when the market will figure out that this stock is worth a whole lot less than the current price, but until you can short the stock outright (when you see weakness on the charts), making a nice premium on selling call options is not a bad idea.