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Angie's List (ANGI) has had a strong year despite recent sell-offs. Although shares are down 26% from the all-time high, the stock is still up over 100% from last November. Even with the recent decline though, Angie's List remains extremely overvalued due to several factors:

  1. The net lifetime value of its current member base is only $322 million. Even if Angie's List can increase its paid membership base by one million per year, it will take until 2017 until it has enough members to justify a $1.2 billion valuation.
  2. To get to the 6+ million paid members required to justify a $1.2 billion valuation would require Angie's List to achieve at least 19% national penetration in its target demographic of homeowners aged 35 to 64 with an annual household income of at least $75,000. Currently Angie's List has only 10% penetration in its most mature markets (those where it has been operating in since before 2003).
  3. Competitors such as HomeAdvisor and Yelp are able to apply competitive pressure via free or low priced offerings that will bring the company's margins down and lower the lifetime value per member. A scenario where Angie's List needs to cut membership fees to an average of $20 per year (from a current level of $30), brings the lifetime value of its current member base down 29% to $230 million even if service provider revenues are maintained. That scenario would also require Angie's List to achieve over 25% national penetration to justify current values.

A large part of the argument in favor the company's current valuation is that its continued losses are due to heavy investment in acquiring new members and advertisers, and that this investment will eventually pay off in substantial profits. We do agree that Angie's List will turn profitable in the future, but we will also show that the expected lifetime value from all its current members is less than 30% of its current valuation. Even if we base the Angie's List valuation on its projected membership base at the end of 2015, its valuation is only $719 million. Two years is an eternity for an Internet company, and with very strong competitive threats from companies like Yelp and HomeAdvisor, there is no guarantee that Angie's List will be able to maintain its growth in a cost-effective manner for that long. We are conservatively putting a $12.35 price target on the stock, which represents a 41% downside to current prices. This is based on Angie's List reaching a paid membership base of 4.4 million at the end of 2015, an increase of 103% over current levels.

Lifetime Revenue Model

The best way to value Angie's List is to determine how much lifetime gross margin can be generated from its user base. A company that can make $100 million from its customers before losing them should generally be valued around that amount (adjusting for cash, brand value, and other assets/liabilities).

For example, A study on Apple determined that its lifetime customer value was $204 billion in 2012, rising to $373 billion by FY2014. When combined with its cash hoard, this amount is in the ballpark of Apple's current valuation. The value of the company's current user base is much smaller at only $322 million, even using some optimistic assumptions. This is far below its valuation of over $1.2 billion.

The lifetime revenue per member is $569.50, offset by lifetime variable expense per member of $373.30. This gives us the lifetime gross margin per member of $196.20. We will go into more detail about where these numbers come from later.

Lifetime Membership Revenue

$127.50

Lifetime Service Provider Revenue

$442.00

Lifetime Revenue Per Member

$569.50

Member Acquisition Cost

$69.00

Selling Expense

$176.80

Operations and Support

$76.50

Technology Expense

$51.00

Total Variable Expense Per Member

$373.30

Member Lifetime Value

$196.20

The remaining factor is the general and administrative expense. This currently amounts to $24 million per year, but this tends to increase slower than the membership count. We are going to assume that it increases by roughly $4 million per year.

The 2.16 million current members are worth $424 million at $196.20 per member. Subtracting 17 quarters' worth of general and administrative expense at $6 million per quarter gives us a lifetime value of $322 million for those members assuming no discount rate.

Based on optimistic growth figures, it will take until 2017 before the lifetime value of Angie's List's members reaches $1.2 billion.

Q2 2013

Q4 2013

Q4 2014

Q4 2015

Q4 2016

Q4 2017

Paid Memberships

2,162,601

2,550,000

3,400,000

4,400,000

5,600,000

7,000,000

Member Lifetime Value (Before G&A)

$424,302

$500,310

$667,080

$863,280

$1,098,720

$1,373,400

General and Administrative Expense

$102,000

$110,500

$127,500

$144,500

$161,500

$178,500

Member Lifetime Value (After G&A)

$322,302

$389,810

$539,580

$718,780

$937,220

$1,194,900

User Churn

User churn is calculated as membership cancellations divided by the average number of paid memberships during a quarter. Churn has ranged from 5.82% to 7.50% in recent quarters. We are going to use 5.88% as the baseline churn percentage for our model, which implies that the average membership length is 17 quarters.

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

Cancellations

68,711

95,465

115,827

100,295

110,516

136,515

User Churn (Quarterly)

5.98%

7.20%

7.50%

5.82%

5.91%

6.64%

Membership Revenue

Average quarterly revenue per member has been on a downward trajectory, decreasing from $8.69 in Q1 2012, to $7.73 in Q2 2013. We are going to use $7.50 in our model for quarterly revenue per user given this downward trajectory.

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

Membership Revenue ($000's)

9,975

11,292

12,769

13,681

14,637

15,911

Revenue Per Member

$8.69

$8.51

$8.27

$7.94

$7.83

$7.73

Since the average membership length is 17 quarters, the average lifetime membership revenue will be $127.50 per member.

Service Provider Revenue

New service contracts are calculated as service provider revenue during the quarter plus the change in contract backlog. For example in Q2 2013, contract backlog increased by $7.1 million and there was $43.3 million in service provider revenue, so we can assume that $50.4 million in service provider contracts were added.

The amount of new service provider contracts is largely related to the number of members. Service providers are paying to advertise to members, and more members equals higher revenues as with most forms of advertising. With Angie's List, past history has shown that a member is worth between $23.05 and $27.63 in service provider revenue each quarter. We are going to use $26.00 per member per quarter in our model, which translates into $442 per member in average lifetime service provider revenue.

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Service Provider Revenue ($000's)

21,119

25,212

29,253

32,498

37,534

43,304

Contract Backlog ($000's)

55,100

61,500

74,900

82,100

95,100

102,200

New Service Contracts ($000's)

30,019

31,612

42,653

39,698

50,534

50,404

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

New Service Provider Contracts Per Member

$26.15

$23.84

$27.63

$23.05

$27.03

$24.50

Selling Expense

Selling expense is reasonably stable as a percentage of new service contracts. It has typically ranged from 38.1% to 45.3%. We are going to use an average of 40% in our model, which means that to get the $442 per member in average lifetime service provider revenue would require selling expense of $176.80 per member.

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

New Service Contracts ($000's)

$30,019

$31,612

$42,653

$39,698

$50,534

$50,404

Selling Expense ($000's)

$12,409

$14,325

$16,240

$15,622

$19,645

$21,977

Selling as % of New Service Contracts

41.3%

45.3%

38.1%

39.4%

38.9%

43.6%

Operations, Support and Technology Expense

The Operations, support and technology expenses are largely correlated with the size of the membership base. There appears to be slight economies of scale with operations and support expense, but technology expense has been fairly constant. We are going to use $4.50 as the operations and support cost per quarter per member, and $3.00 for the technology expense per quarter per member. Over the 17-quarter member lifetime, this equals $76.50 for operations and support and $51.00 for technology.

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Average Paid Memberships

1,148,072

1,326,230

1,543,921

1,722,081

1,869,584

2,057,188

Operations and Support ($000's)

$5,775

$6,716

$7,140

$7,450

$8,298

$10,104

Operations and Support Per Member

$5.03

$5.06

$4.62

$4.33

$4.44

$4.91

Technology Expense ($000's)

$3,127

$4,191

$4,905

$4,647

$5,595

$6,812

Technology Expense Per Member

$2.72

$3.16

$3.18

$2.70

$2.99

$3.31

Conclusion

Angie's List is growing and will likely generate profits sometime soon. However, it does not make sense to value a company at $1.2 billion whose users will generate only $322 million in value over their lifetime. That is akin to paying $1 for less than $0.30 worth of future income.

It will likely take until 2017 before Angie's List has enough members to justify its current valuation, and that is assuming that it does not suffer from increased competition or face increased costs to acquire new members in mature markets. There are very substantial risks that could prevent the company from reaching that mark. Some may argue that Angie's List will be able to improve measures such as user churn and service provider revenue per member, but it has only made incremental progress on those items recently, and we have already incorporated favorable metrics that assume some improvement.

We have set a 12-month price target of $12.35, which represents a 41% downside to the current stock price.

Source: Angie's List: Only $322 Million In Member Lifetime Value, Yet Valued At $1.2 Billion