I have been following Angie's List (ANGI) struggles as an investor (I'm short in it) and I wrote a couple of articles for Seeking Alpha explaining my reasons to be short, and especially focusing on the evolution of ANGI's growth. With the publication of ANGI's results for the third quarter of 2013 and with the approaching end of the last quarter of the year, it makes sense to refresh my take on those points.
So, here it goes:
Extremely short version (for those that don't want to waste time reading another article about ANGI's significant problems):
ANGI's "membership" growth is stalling. Its business model does not allow for significant overall growth without membership increases. Competition is already strong, seems to have better business models, and still new competitors for the same client base keep showing up. In the present course, ANGI may, at best, reach something close to break-even. However, even if it evolves for the best, ANGI will probably have to increase share capital to cover the accumulated losses (they translate into an already negative equity, that is still increasing). Even in the best scenarios ANGI's business model will probably fail to generate significant positive net income, and is far from justifying the present (still very high) stock valuation.
ANGI's last quarterly results were unsurprising. They point to an effort from ANGI's management to reduce the recurring losses, by reducing expenses. That effort seems inevitable in a company that lost money every year since its inception, has negative equity (in spite of a recent capital increase through a relatively large IPO), and in still losing money fast (they lose money in 3 of the 4 quarters of the year, although they now manage to achieve marginal profits in the fourth quarter, due to a cyclical pattern of reduced investment in the last few months of each year).
From my point of view, ANGI's bottom line results of the third quarter 2013 were in line with what could be expected (they fell just a little below analysts' expectations), and the same can be said of the other main financial indicators, including revenue, cash flow, etc.. The only (limited) surprise was an even faster decrease of membership growth than could be anticipated.
In my second article about ANGI, I presented this table (note the strong seasonality):
"In spite of the more pronounced reduction of growth in the second quarter, to discount the possibility that this quarter may simply have been slightly below average, I will keep my previous predictions for the next two quarters unchanged at:
- End of Sep. 2013 vs end Jun. 2013: Close to 12 or to 13%. (Was 20% in 2011 and 16% in 2012.)
- End of Dec. 2013 vs end Sep. 2013: Close to 7%. (Was 9% in 2011 and 8% in 2012.)"
But, in fact, ANGI's quarterly membership growth in the quarter finished in the end of September 2013 came at only 10%, against my prediction of 12 to 13%.
Now, we all know that ANGI gets most of its revenues from service providers' "advertising", and not from client memberships (in fact, service providers pay for more than just ordinary advertising: subjected to some restrictions, they can effectively pay to be placed on the top of ANGI's ordered list of recommended providers, as shown to its paying final clients/members!). Since most of ANGI's revenue comes from this (very dubious) scheme and only some 25% comes from paid memberships, some have argued that the fact that ANGI's membership growth is slowing so fast is not very relevant.
I disagree with this point of view. I believe that the only motivation for service providers spending in "advertising" is to reach the client base formed by ANGI's "members". If their numbers stop growing (and stabilize, say, around 3 million) then "advertising" from service providers will likely also stabilize. A more complete discussion of this point can be found here. Anyway, in a simple flyover description, ANGI's limitations stem from the fact that their business model implies paying to access user opinions about service providers. Naturally, for each "member" that ANGI (after significant "user acquisition" costs) manages to enroll, many refuse to join (or leave after some time paying) thinking something like "Why should I have to pay for the opinion of others when I write my own opinions for free?" Moreover, most (all?) of ANGI's competition seems to understand that this model is wrong, and does not require payment from their final user's base. I believe that trying to force its clients to pay for mere opinions written by service users like themselves leaves ANGI in an isolated position, fighting a losing battle against increasing competition.
Now, since ANGI's evolution seems stable and foreseeable, I will risk some predictions for the fourth quarter of 2013. For my analysis, I use a spreadsheet and develop projections for the evolution of a dozen fundamental company indicators (based on linear models of the seasonally adjusted recent tendencies, "corrected" by regularly updated personal "guesstimates" of ongoing changes of tendency). However, to keep this article within a reasonable length I will omit the details of how I calculate my predictions, and will also omit my predictions for aspects that don't seem so relevant for ANGI's future (revenues, debt, cash flow, etc.), and will just focus on net income and membership growth.
So, for the fourth quarter of 2013, I expect a profit in the region of 6 million dollars. This translates into a quarterly result per share of around $0.10 and should reduce the negative equity of the company to a value around 17 million dollars. (For comparison, at the time of writing, the average of 20 analysts referenced in Yahoo Finance estimates a fourth quarter result of $0.14 per share, not much above my personal prediction of $0.10.) Taken in isolation, this seems a nice quarterly result. But, unhappily for ANGI, due to consistent seasonality the following quarters will almost certainly get back to negative, and I expect yearly losses to go on for the foreseeable future. This would be less important if ANGI was a fast growing start-up tech company. However ANGI has many years of operation (its inception dates from June 1995!), and at present its market penetration seems to be stabilizing and reaching a plateau (where it may be difficult to remain, due to increasing completion, with better business models).
So, getting back to the specifics of membership growth, the most updated data is shown in the following table:
To understand the growth rates in this table one needs to follow the horizontal lines, related to the same quarters of the last few years. My previous prediction for the forth quarter of 2013 (already shown above) was a 7% growth. However, the most recent data shows that membership growth is now compressing faster than it used to, so I will now revise that previous prediction to a value closer to 5 or 6% (growth was 9% in 2011, and 8% in 2012). This prediction is especially difficult to make since there are no public news about the results of the controversial "experimental promotions" ANGI has tried recently.
And, naturally, any predictions (but especially when they involve hard numeric data) are a tricky business. They can be validated by the reality, they can fail by little, or they may fail by a lot. For me, if they fail and ANGI's results surprise me by being better than I expect, that will mean a fast reevaluation of my short position on ANGI.
Now, having dealt with the most risky part of this article, two last points still seem worth of mention:
The first of these final points is the fact that even after a price correction to less than half of the share price of 5 months ago, the biggest officer shareholders (William S. Oesterle, co-founder and CEO, and Angela R. H. Bowman, co-founder and Chief Marketing Officer) keep dumping their personal holdings of ANGI's stock at an alarming rate. (I think that anyone interested should check this personally, because it is really impressive! Try here or here.) Naturally, this stock selling is totally legitimate, but for any non-insider shareholder this can hardly be regarded as a reassuring statement of firm trust in ANGI's future. (Note: I don't think these officers can be criticized for that. If I were in their place I would be doing exactly the same. Also, I don't think that ANGI's management can be directly blamed for the company's difficulties. I believe that it is the business model itself that prevents the company from achieving better results. ANGI was built on the basis of a very specific business model, locked itself in it through long term publicity claims, and now can't back out of it without significant losses.)
The second point is a cautionary note to those that may be tempted to buy ANGI's stock just because of the recent price correction: Half of an infinite PER is still an infinite PER (and to reach even that ANGI still needs to improve until breakeven, something that, at best, is still uncertain). Even if one believes that ANGI's business model will (after almost 20 years of loses) eventually start working, applying to this company any reasonable fundamental evaluation metric would still show it to be highly overvalued, even after the recent price correction. (And, remember, the continued stock selling from the top-level management seems to show that they agree with this point of view.)
So, to finish, ANGI's business is evolving in line with my expectations, based in fundamental analysis. These expectations point to a mediocre future for ANGI and, at present stock prices, they lead me to maintain my short position.
Now let's wait for ANGI's results in the last quarter of 2013…