Angie's List (NASDAQ:ANGI) is one of the few stocks where revenue is surging over 30% annually, yet the stock trades at all-time lows and low growth relative valuation multiples. The company is built on authentic reviews of local service and helps connect consumers directly to its online marketplace of services from member providers. In essence, Angie's List is at the center of the highly valued local market with no imputed value by the stock market.
The market didn't like the Q214 earnings that missed both top and bottom line estimates due primarily to the Big Deal group of deep discounted email offerings that continued to struggle. In addition, the market didn't like the suggestion of actually lowering Q3 marketing spend dramatically below Q2 levels and actually below the levels from last year. Combined with some other moves, Angie's List is moving away from growth at all cost measures for good reason though the market doesn't like it.
While Angie's List continues to struggle to hit targets, competitor Yelp (NYSE:YELP) is soaring with higher growth rates and a significantly larger user base. Though clearly Yelp is distancing itself with revenue growing nearly double the rate of Angie's List, the stock is actually worth more than 10x Angie's. At the same time, Yelp only has a fractionally larger business at forecasted revenue of $99 million for Q314.
The lack of a membership fee has allowed Yelp to scale faster and grab more users, especially in the categories that don't rely heavily on reputable consumer reviews. The question is whether these valuation differences don't provide opportunities for contrarian investing.
Angie's List provided the following highlights for Q214:
- Gross member additions of approximately 399,000 at an average cost per acquisition of $90.
- Revenue of $78.9 million, representing a 33% increase over the prior year quarter.
- E-commerce revenue grew 57% in Q214 to reach $7.8 million.
- Cash provided by operations of $2.6 million and $17.5 million, respectively, for the three and six month periods ended June 30, 2014.
The gross members added were a quarterly record. The company spent $35.9 million on marketing and another $30.3 million on sales. In total, sales and marketing accounted for $66.2 million in expenses, or roughly 83.9% of revenue. Yelp only spent a combined $47.8 million on sales and marketing significantly lower than that spent by Angie's List. The key is that Yelp has a higher revenue based and only spent 53.8% of revenue during Q214 on the expenses to acquire users and customers on its platform.
While participating service members on Angie's List grew to 51,076, the numbers only grew by 20% YoY. The more impressive number was the 35% increase in the outstanding service provider contracts to $224 million. As a comparison, Yelp claims 79,900 active local business accounts that grew 55% YoY during Q214.
Ultimately, the market wasn't pleased that Angie's List spent nearly $36 million on marketing while only adding 399,000 members. Though the company claims to have pushed some marketing spend forward to start Q3 off with a better push.
Angie's List provided the following guidance for the current quarter:
- Total revenue of $80.5 million to $82.5 million.
- Marketing expense of $20 million to $23 million.
Combined with the recent 8-K filing of cutting 97 employees from the sales organization, Angie's List is cutting a lot of the fat from the sales and marketing spend with possibly a bigger push to get more revenue from the existing 2.8 million members.
While it isn't clear how much the cut will save, the company had 1,266 employees in the sales organization at the end of June. Angie's List spent a little over $30 million on sales expenses during Q2 and a cut of roughly 7.7% of the employee base would save around $2.3 million quarterly. The new level of spending of around $28 million on sales and $21.5 million on marketing brings the total spending to $49.5 million, or roughly 60.7% of the forecasted revenue for Q3.
Last Q3, Angie's spent $24.0 million on sales and $28.2 million on marketing for a total of $52.2 million. The amount was roughly 79.7% of the generated revenue for the quarter of $65.5 million.
If the company can actually show that type of leverage, the stock becomes more attractive. Being able to cut marketing spend while growing revenue by $16 million during Q3 is a good sign after years of possibly overspending to obtain users.
Evolution Of Plan
Angie's List is shifting the plan from a focus on high levels of membership fees to a tiered pricing level with a bigger focus on e-commerce transactions and higher integration with service providers. As a prime example, the membership revenue for the Post 2010 cohort is only $12.31 per member compared to $36.23 for the Pre 2003 cohort (original group of 10 markets).
The increasingly important marketplace transactions grew 51% while website interactions increased a substantial 300%. These interactions include consumer reviews and online appointment requests amongst other items.
The CEO even made it clear on the earnings call that the company was going to focus on renewing and enhancing the current relationship with current members and service providers over adding new relationships at high costs.
Bill Oesterle - Chief Executive Officer
Yeah nearly the entire business with the exception of big deal has this notion of recurring revenue. And so you can think of it as the average age of the relationship increases, the margin increases. And so when you're adding lots of new relationships to the model, your margin decreases quite a bit. And so, secondly what we -- the way that you get appreciation is just by allowing the average age of the relationships that increase and almost the recurring base that we have bigger than as it's ever been. So, the existing base that we have is bigger than as ever been its margin characteristics what we referred to internally as the P2 margin characteristics are dramatically better than the P1 or new origination margin characteristic so just from a weighted average standpoint as more of the base shifts into that P2 bucket relative to the P1 you get very dramatic margin increase. As we've stated in the script you can expect to see that in the second half of the year.
Investors should look no further than the cohort analysis where the pre-2003 cohort generates an average of nearly $7 million in revenue and spends on average $1.5 million marketing expense. Those numbers very much suggest Angie's List is possibly spending too much on new markets and customers, instead of figuring out ways to maximize the established markets.
The interesting note is that Yelp recently announced the entry into its 27th market while Angie's List has a total of 253 markets. According to the market analysis, Angie's List spends over $25 thousand more on marketing for the last cohort of markets than they generate in revenue.
With the stock trading with an enterprise value of roughly 1x 2015 forecasted revenue, Angie's List has some intrigue. The company spends the vast majority of sales and marketing expense to attract new members and service providers that contributes a great deal to the consistent losses. The possibility exists that the company is reaching into markets where scale is an issue and marketing spend isn't effective.
The current quarter will be very critical for Angie's List to prove the consumer review site can evolve the business plan from hyper growth to one with profitable focus on expanding existing customer relationships. Scale is a major issue for the concept, but the valuation and the attractive local nature of the business makes the stock one for contrarian investors to watch. Any sign that the significant marketing spend cut has limited impact on the acquisition of new customers and investors should snap up this stock.
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