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ANGI is rapidly losing market share because it charges for a service its primary competitor gives away for free.

ANGI is spending so much on sales and marketing, it has little chance of becoming profitable.

ANGI has little choice but to convert to a free membership model.

Angie's List (NASDAQ:ANGI) in its present form is a subscription model. Customers pay to access users ratings on various services such as contractors, auto repair and healthcare and give their own ratings. As of June 30, 2014, ANGI had 2.8 million members paying an average of $26 a year. The annual fee may not seem like much, but it is a lot more than direct competitor Yelp which provides its service for free. Charging for a service given away by others for free is a losing proposition. To give an idea of the impact, Yelp grew revenues by 61% year over year in the quarter ended June 30, 2014. ANGI's revenues only grew 33%. Yelp was able to get its growth with a sales and marketing cost of 53.8% of revenues. ANGI's sales and marketing cost was 83.8% of revenues. ANGI is spending more on marketing and getting much less growth. It is also impossible to be profitable when you are spending 83.8% of your revenues on sales and marketing.

As a result of its huge sales and marketing expenditure, ANGI is hemorrhaging money and has a negative net worth. In fact losses increased to $18.4 million in the June 30, 2014 quarter from $14.3 million one year earlier. The huge marketing tactic is failing. Also ANGI risks losing its biggest advantage over Yelp, ratings on contractors. ANGI has that market mostly to itself currently, but with Yelp's rapid growth, they could lose it. This would then give customers no reason to go to ANGI. With the negative net worth, the large losses, and the risk to its edge in contractor ratings, time is running out. This business is like eBay, in that there needs to be a critical mass to be a player. ANGI currently has a critical mass in parts of the service review market. This critical mass gives ANGI a value that probably exceeds its current market cap. ANGI risks losing this value due to its weak financial condition and rapid advance of its primary competitor.

Fortunately there is a way forward for ANGI which could quickly rejuvenate the company. Simply switch to a free model like Yelp. Yelp has proven that model can be profitable with significant growth. The switch can be done quickly and easily. ANGI only gets 23.4% of its revenues from membership fees. To break even it would have to significantly reduce sales and marketing expenses. Other operating expenses were 39.1% of revenues in the quarter ended June 30, 2014, below Yelp's percentage of 42.5% indicating it is operating relatively efficiently there. As noted above, Yelp was able to get 61% growth with 53.8% of revenues going to sales and marketing expense. Based on Yelp's experience, ANGI should be able to put 50% or less of revenues to sales and marketing expense and still get strong growth. With 50% of revenues going to sales and marketing, ANGI would be profitable and have a pretax profit margin of 10.9%. Being profitable would erase any bankruptcy fears.

The case for a change to the free model is made clear by the market cap of ANGI and Yelp. Despite having a similar level of revenues, Yelp on August 22, 2014, had a market cap of $5.88 billion versus $475 million for ANGI. Moving to Yelp's free model, with a cut in sales and marketing costs to Yelp levels, could increase ANGI's stock price quickly and considerably. Also helping the stock price is the conversion to free will make the company more profitable as cuts in marketing will likely exceed the lost revenue. ANGI is currently moving in the free direction, as its membership fees have declined or been discounted. Based on ANGI's deteriorating financial position, the low portion and decreasing of revenues derived from membership, and Yelp's rise, I don't believe it is a question of if, but when, ANGI makes the conversion.

The investment community is currently bearish on ANGI. In Seeking Alpha alone, eleven of the past twelve articles were bearish. Currently 11 of 17 analysts rate it a hold with one rating it a sell. With so much negativity there is opportunity. A long position is risky and speculative and should only be done with a relatively small portion of your portfolio.