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Summary

  • In the health care segment, the ANGI data gathering system (and subsequent data quality) is very weak!.
  • Since their respective IPOs, why has ANGI so significantly underperformed YELP, given the basic similarities in the business model? The answer: the consumer pricing strategy.
  • The ANGI consumer pricing strategy has destroyed significant shareholder value, because it’s failed to recognize the true-value of membership!.

From membership, ANGI elicits a consumer review with common gift certificates! Or it offers ANGI CASH for membership referrals! Why?

If ANGI positions correctly in the market, then the consumer naturally provides the review! And if the service provided by ANGI creates value in the market, then the consumer naturally joins the membership and uses the service.

Since the most recent upgrade by Bank of America Merrill Lynch on 6/6/14, ANGI has generated an ROI of approximately 25%. Bank of America Merrill Lynch also cited an increased confidence in the business model of ANGI.

At the Bank of America, Merrill Lynch Global Technology Conference, Bill Oesterle (ANGI CEO), described ANGI as a consumer paid service selling higher quality data.

In the health care segment, both the data gathering and the data quality is very weak! Frequently, the SAME healthcare provider (doctor, dentist) has been entered into the ANGI system several different ways. This produces no accountability within the ANGI system and - more importantly - no accountability within the market. To create real satisfaction in the market, there has to be accountability within the market. The consumer review has to be associated with a specific healthcare provider (doctor, dentist) in order to create the satisfaction in the market. Unfortunately, the current ANGI system doesn't efficiently provide this level of specificity.

ANGI could develop this specificity internally. Every healthcare provider has to be licensed. ANGI could secure the licensing data from the relevant agency and build a database of healthcare providers for its membership. And through regulatory licensing requirements, ANGI could maintain the accuracy of the healthcare provider's information. Thus, allow the consumer review to be associated with a specific healthcare provider (doctor, dentist). This type of data gathering would specifically address some of the quality issues within the ANGI system.

In order to create satisfaction in the market, the consumer review has to be associated with a specific healthcare provider (e.g.; doctor, dentist), so secure the relevant licensing data and build a level of accountability within the ANGI system by protecting the value of the consumer review.

The process of gathering a consumer review within ANGI is too cumbersome! To create a consumer review, ANGI requires the consumer to rate nine categories using five or six degrees of satisfaction. Furthermore, the consumer has to address at least six additional categories or questions to finish the review.

If the consumer review creates the value for ANGI, then why make the process of gathering it so tedious? The process of gathering a consumer review should be short and efficient:

  1. Simplify the process - measure one variable to statistically rate the experience.
  2. Rate the degree of satisfaction from the experience using a scale A - F
  3. Simplify the process - provide only one variable to describe the experience. What happened?
  4. Simplify the process - use one variable (automatically entered) to measure a point in time.

Simplifying the process encourages the consumer review, tightens the measurement parameters and improves the ability to statistically segment the data and stratify the market. This creates significant value for the service provider. It's a direct connection to the consumer. It's the most efficient form of marketing, which makes it very valuable to the service provider, making it easier to sell ANGI in the market.

Capital Executive LLC recognizes the incredible value within ANGI. But something isn't right given the relative performance of ANGI in the market! ANGI has generated a negative return for its shareholders since its IPO on 11/15/11, whereas YELP has generated a positive return for its shareholders of more than 300% since its IPO on 3/1/12. Why is there such a significant difference?

At the end of the day, both ANGI and YELP should basically operate from the same business model. Essentially, both provide consumption advice through the consumer review. The only difference is the target market. YELP targets restaurants, bars and coffee establishments, whereas ANGI targets the home repair, yard maintenance, automobile restoration and health care segments of the market.

Given the business model similarities, why has ANGI so dramatically underperformed in the equity market? Several reasons: a) consumer pricing; b) data gathering; c) and data quality. However, the main driver of the underperformance is the consumer pricing strategy. The true-value isn't in the paid subscription; it's in the membership!

Using the annual operating data of ANGI from 2007 through 2013, with the penetration rate as the independent variable (X) and total revenue as the dependent variable (Y), the regression analysis produced the following table.

Regression Statistics
Multiple R0.993866214
R Square0.987770051
Adjusted R Square0.985324061
Standard Error9771314.41
Observations7

The statistics suggest a very strong relationship between the variables. But where is the value of ANGI in the market? Is it the penetration rate or the paid subscription? In the analysis, these variables have to be contrasted because one variable (price) undermines the other variable (quantity) - or penetration. It's just an application of simple economics!

The following graph illustrates the statistical relationship between the penetration rate into the target market and the total revenue generated by ANGI from 2007 through 2013.

(click to enlarge)

The statistical relationship between the variables is so strong, the predicted line (black dots) is right on top of the actual line. This creates a reasonable argument for extrapolating the relationship between the penetration rate and total revenue.

To help illustrate the true-value of membership for ANGI, the following graph extrapolates the strong, established, operating relationship between the penetration rate and total revenue. The extrapolation indicates total revenue of approximately $500M - if ANGI achieved a penetration rate of 20% across the board into the target market. It also indicates total revenue of approximately $1.2B - if ANGI achieved a penetration rate of 40%. And total revenue of approximately $2.9B - at a penetration rate of 100%.

(click to enlarge)

Granted, the preceding graph is theoretical, but it is based on the established relationships created by the operations of ANGI. It's a reasonable argument, and it's clearly impressive in terms of potential. In addition, the established relationships don't even consider ecommerce. And by considering ecommerce potential, the demand line (total revenue) shifts up, perhaps significantly. Maybe the potential is $5B, or $10B, or $25B. The actual degree of the shift will be defined by the penetration into ecommerce. In any event, the market potential is clearly impressive!

But ANGI will never realize anything close to this potential under the current, consumer pricing strategy. Price (by definition) creates an impediment to consumption. And ANGI complicates this impediment with a tiered consumer pricing strategy. Each pricing tier not only impedes penetration but also multiplies the impediments to consumption when factored together. It's a self-defeating strategy!

Please change the consumer pricing strategy. The value is in the membership - not the membership fee! Please require membership registration, including credit information. But give away the consumer membership! Take a leap of faith and provide an altruistic service to the consumer! If the service really creates value in the market, then the consumer naturally gravitates to the service. This creates a bigger a market for the service provider, while spending significantly less on marketing expenses. It will make it significantly easier to sell the value of ANGI in the market, especially to the service provider, creating significant value for the ANGI shareholder.

Coming back to the original question: "why has ANGI so dramatically underperformed in the equity market?" The main reason: the consumer pricing strategy! This strategy has actually created significant impediments to the consumption of the ANGI service. Price (by definition) creates an impediment to consumption. ANGI compounds the pricing impediments by using a tiered, consumer pricing strategy. Each pricing tier not only impedes consumption but also multiplies the impediments to consumption when factored together. The ANGI consumer pricing strategy has destroyed significant shareholder value, because it's failed to recognize the true-value of membership! Selling consumer paid subscriptions doesn't recognize the true-value of membership! The true-value is in the membership - not the membership fee! The member creates the value of a market, especially to the service provider! ANGI sells the value of the market to the service provider! ANGI creates significant value for the shareholder!

Why is Facebook (NASDAQ:FB) so valuable in the market? A market cap of ~$165B. Because Facebook has recognized the true-value of membership! The goal is to achieve 100% penetration into the target market. And the same goal applies to ANGI. Think about it! How many members would Facebook have today if it used the consumer pricing strategy of ANGI? Not over 1.2B! The ANGI Strategy fails to recognize the true-value of membership?

The true-value is in the membership, so maximize the membership by giving it away to the consumer. The goal is to achieve 100% penetration into the target market! The revenue lost from the consumer membership fee represents only a fraction of the value created for the service provider.

For more information about Capital Executive LLC, visit the website listed below.

Sincerely,

Ken Copley

Capital Executive LLC

www.capitalexecutive.net

Source: Angie's List - The Business Model