Angie's List (ANGI) is worth somewhere between $0 and $5, and the market is just now waking up to this fact. The stock is already moving down, and the first major public catalyst will be the Q2 2013 results, scheduled for July 24. Immediately afterward, I expect a massive drop in the stock price along with a proposed secondary equity offering. I also expect Angie's List to highlight a "slight change" to their business model.
I am making a bold prediction: Angie's List's all-time high occurred July 8, 2013, at $28.24 and it will trade below $25 by the end of the month. ANGI will trade under $10 -- perhaps under $5 -- by the end of the year.
The Seeking Alpha community has been outspoken about Angie's List since their IPO in November 2011 ($13) and subsequent secondary in May 2012 (also $13). Contributors have submitted 37 articles in total. Of these articles, six are informational in nature and 31 are negative. In the market, all that matters is your total return, so essentially 100% of the opinionated articles have, at least up to this point, been wrong.
ANGI (at $27.15) is up 109% since its IPO and up 126% YTD, even amid 12 harshly critical writeups. So clearly these authors have been wrong in, yes, the trading sense. In the long term, it remains to be seen. I firmly believe these authors will be vindicated and some, such as George Kesarios, will look especially prescient with short articles posted on the same day as all-time highs.
Angie's List today is Netflix (NFLX) on July 14, 2011. Netflix had just reached its all-time high of $304.79 (on July 13), and quickly dropped 6% the next day. The business model was falling apart, and the smart money started taking profits. Quarterly results came on July 25, followed by an intraday drop of 11%. This was only the beginning. NFLX ultimately fell as low as $62.37, 80% from its height, and required an issuance of emergency equity and debt near the yearly floor price.
The parallel is strong. Two broken business models, poorly financed balance sheets, enormous YTD gains, and endless articles calling for Netflix's demise. Angie's List is worse. Netflix had a dominant share of the marketplace and was firmly entrenched with the technology market. Angie's List is a minor player in a crowded space. In comparison to Netflix, few would notice if this company disappeared.
The Underlying "Why"
Angie's List is in a bubble. Market irrationality (the voting machine) has pushed beyond any conceivable cash flow valuation (the weighing machine). The reason no positive article exists on Seeking Alpha is because the majority of authors focus on underlying fundamentals and potential catalysts. There is no rational valuation model that places ANGI north of $10, and there are no realistic potential catalysts in sight. The entire rational trading case of ANGI since early 2013 was "buy now, and hope a stranger will buy higher later." In hindsight, this was the correct trading approach.
Several authors have offered exceptional reasons to be negative on Angie's List, so instead of offering my own model and restating many similarities to their work, I'm going to link to their work and offer a paraphrasing of the case.
-- ANGI's working capital and equity is negative. George Kesarios does an outstanding job of highlighting the largest issue -- the broken balance sheet. I noted these same numbers during the Q1 2013 presentation and bought some puts in mid-May. From my Stock Talk (May 16): "Initiated a short in $ANGI -- Nov. 13 $17.50 puts. They will need a capital raise in the next Q or 2." George and I see eye-to-eye on this issue, I recommend reading his article as well.
-- ANGI's business model is broken and growth is stalling. Pedro de Almeida's Seeking Alpha debut skewers the business model. He highlights the negative cash flow, business model difficulties, and rapid growth slowdown. Pedro does a good job explaining that Angie's List is not new technology. This is essentially 1990s technology disguised as some new "Web 2.0" package.
-- ANGI has been targeted by Citron Research. SoundView Technology Group summarizes the report, which is extremely scathing. Long story short -- we are looking at a broken company trading on fumes.
-- ANGI is facing strong new competition. Charles Patton writes an excellent piece highlighting a new startup Thumbtack.com. This startup has over 4x the service providers as Angie's List despite only four years of operations. Since George and I both see ANGI trying to pivot to service providers as a source of revenues, I believe this key competitor will be a major roadblock.
-- ANGI's valuation does not meet any rational growth potential model. Scott Ryan cautions against using pure valuation as a short indicator and presciently warns readers (published May 24) against shorting momentum names like Tesla (TSLA) and Netflix . He "[won't say] Angie's List is the next WebVan or HomeGrocer," but I will. Angie's List has strong potential to go bankrupt within the next year without a massive equity raise.
I typically include a strong bull-side argument to balance out the presentation. I cannot find a credible one anywhere on the Internet. The best I found was a general overview by John Moore over at Motley Fool. In fairness, he does not really tout buying the stock, but claims the company has a "clear advantage" in their sector. Analyst price targets are high, including Jordan Rohan of Stiefel Nicolaus, who raised his target from $29 to $31 two weeks ago. The range of price targets is currently $22-$32, with a median of $26.
My one-year price target is $10. Long term, my price target is $0.
The Dangers of Shorting
In a short position, the average investor doesn't have much room (or time) to be wrong. Short borrow fees, especially on crowded trades, can add up quickly. Add in margin costs and the sizable opportunity costs incurred (assuming a rising market), and the entire endeavor can be quite painful. If you want to limit your losses, a stop-loss order is essentially free, but also solidifies your losses. Buying calls as insurance can be very expensive.
I suffered with Netflix for almost a year before sweet redemption. I am currently bidding my time with LinkedIn (LNKD). My point is that I understand the implicit cost of taking a short position.
Although I firmly believe Angie's List has reached an all-time peak, I never advise a "naked" short on any volatile stock. Either short with protection in the form of September $30 calls, or buy out-of-the-money puts. I currently favor the November $15 puts. I also plan to buy out-of-the-money weekly puts as an earnings play unless the premiums are too high (over 10% daily move required to breakeven).