Having been early to the party of Angie's List (ANGI) short sellers, I would be remiss not to update readers to the fact that I changed my outlook for the company.
In my columns spanning over the course of a year, my issues with Angie's List were not so much with its business model but with the valuation. I did not believe their subscription model would justify the market cap. Most consumers prefer FREE and the number of those who would pay an ongoing annual subscription of $50 is naturally far less than the 80 million visitors a month who visit Yelp for example. As I elucidated in my prior columns on Angie's therefore, I did not feel the market cap of $1.6 billion reflected the prospects of a company with a couple million subscribers. I did however maintain that I thought Angie's would continue to remain a viable niche business (with a much lower market cap).
What has changed enough to make me go long?
Angie's market cap has declined substantially over the past couple of months. I would normally in such a case ignore my former short and remain neutral since the downside no longer represents a compelling short opportunity (unless they went to zero as one of my esteemed SA peers expects). As of Friday, however, I have established a modest long position in Angie's List. Having seen the growth potential, I have long been positive on the sector as a Yelp long who recommended simultaneously shorting ANGI.
Recent developments have swayed my thinking as to the possibility of future growth catalysts that were not prevalent under the Angie's List model as it existed at the time I went short. Angie's List was built upon the thesis that reviews are written by paying subscribers, not anonymous individuals who can make up numerous identities and sign up for free accounts. Therefore, significant skepticism was pointed out by columnists in regard to the fact that if Angie's List went for the larger subscriber base by changing to a free model, they would lose all credibility as it would go against the premise of one of their key selling points.
Angie's List can take their greatest obstacle and turn it into a positive without jeopardizing its central thesis. The largest source of controversy on the free review models such as those on Yelp (YELP) is the legitimacy of the reviewer as anyone can make up an identity and write fake reviews under it. There are actually shady companies out there offering businesses Facebook "Likes" for a fee and claim to have the ability to give my business thousands of Likes. (I've often received their e-mail solicitations). This is where I see hope that Angie's List can leverage their method and open up the door to substantial subscriber growth.
On October 2, news began to circulate that Angie's List was cutting subscription fees as much as 75 percent to $10 a year in select markets including San Francisco and New York. Many perceived such a drastic move as desperation. That is good. I like that Angie's List management is seeking to adapt to the challenges by quickly announcing their cost reduction tests in select markets.
Since only a little over a quarter of its revenue comes from the subscriber fees and the majority from advertising dollars, Angie's may be able to maintain their compelling selling point of non-anonymous, verified reviewers, even if the fee were as low as $1.00. If they were to reduce the membership fee to a token amount, they would still maintain that key selling point because the paid model requires true identification to be submitted at the sign up process. That would dissuade the vast majority of pranksters and those who seek to libel competing businesses on other review sites because it still eliminates the anonymity factor.
Because of the lucrative advertising component that accounts for their revenue growth, I believe Angie's would more than offset the loss in revenue for each individual subscription by garnering memberships in the tens of millions versus the couple million they currently maintain. The larger membership numbers could greatly help Angie's List to establish a presence in markets where they are currently non-competitive such as the trillion dollar plus segment of restaurant and entertainment.
This is how "almost free" can be superior to free. The virtue of the paid subscription is that it requires verification. Angie's List has a well recognized, strong brand name for which they have paid substantially over the past decade. The closer they bring that membership fee down to one token dollar, the more subscribers they will accumulate and the more subscribers, the better chance they have of capitalizing on new business segments.
A service with any amount of fee, no matter how diminutive will never gain as many members as FREE services like Yelp and Google (GOOG). However, it will bring in substantially more, narrowing the gap and will allow them to continue to emphasize the quality of the audience their advertisers are reaching - and doing so in expanded market segments.
I have respect for my fellow colleagues who went short Angie's along with me. Some believe that Angie's will go out of business and have asserted their accounting is dubious at best (my euphemism). I do not challenge them as they seem better versed in accounting than I am. I have read their debates with others who took issue with their negativity and both sides seem to make compelling remonstrance one to another.
I regard myself as more of a visionary investor who looks at business models, potential demand, innovations and where I think specific industries are heading. I look at the numbers and believe that no man knows the exact number for intrinsic value but we can reasonably determine if a company is at least in the ballpark. To me, right now, given the present opportunities and managements proactivity, the price looks right.
I in no sense over-weighted in Angie's List but if I'm correct I believe the investment has the potential to gain some weight as a percentage of my portfolio.
In the interest of full disclosure, below are my prior three columns that were negative on Angie's List going back to September 2012 - August 2013: