Why Angie's Shouldn't Be Listing An IPO

Nov.13.11 | About: Angie's List, (ANGI)

Angie's List (NASDAQ:ANGI) offers independent reviews of local service providers via its subscription-based web platform since it was founded in 1995. At first glance, ANGI provides a more proprietary system with a defensible moat than fellow internet listings of Groupon (NASDAQ:GRPN) that recently listed or Zynga (NASDAQ:ZNGA) that is in the process of listing. ANGI would appear to be a more attractive investment.

After all, the company has a long history of service provider reviews that a new service could never match. Knowing the work history of a contractor over the last 5-10 years has to be invaluable and this kind of information would prevent any startup from matching the Angie's List's offerings. Conversely, a new startup has the potential to offer a better daily deal than GRPN or a better Facebook game than Zynga.

With the company's recent announcement of its intention to go public (see roadshow here), investors got the first look at the financials via the prospectus. The view provides a completely different picture than expected. The company is growing fast, but operating expenses are growing faster. What has the company been doing the last 16 years? The net loss nearly doubled for the first nine months of 2011 as compared to 2010.

Marketing expenses alone were nearly $48M on only $62M of revenue. Yikes, it appears ANGI has to spend a ton of money to attract members and advertisers.

The first risk on page 10 of the prospectus highlights the main issue with investing in this IPO. The company expects to continue to lose money while aggressively growing out markets.

The biggest problem appears to be that ANGI relies on building out new markets since advertising revenues accounts for over 50% of revenue. So, instead of just opening the "list" to any member that wants to review a service provider, the process is a lot more structured, time consuming, and expensive.

On the flip side, ANGI has already set up 175 markets now with a large majority taking place in the last few years, hence marketing costs should be dropping as a percentage of revenue going forward. The mature markets only spend 20% on marketing compared to an average of 77% currently for all markets.

Sure the marketing expenses will drop and economies of scale will kick in, but that 20% still remains high. Shouldn't members flock to them if the service was that great? Who hasn't heard of Angie's List to the extent that it still needs to market so much?

Concerns remain and investors should be wary. My biggest concerns are the following:

  • Memberships remain low at only 1M. The paid model is holding back the numbers though not helping the bottom line.
  • Costs continue to grow faster than revenue
  • Company has never been profitable
  • Relying on advertisers though the user base is very low

Details on IPO per IPO Home:

Angie's List, which offers independent reviews of local service providers via its subscription-based web platform, announced terms for its IPO on Wednesday (11/2). The Indianapolis, IN-based company plans to raise $106 million by offering 8.8 million shares at a price range of $11.00 to $13.00. At the mid-point of the proposed range, Angie's List will command a market value of $677 million. Angie's List, which was founded in 1995 and booked $79 million in sales for the 12 months ended September 30, 2011, plans to list on the NASDAQ under the symbol ANGI. BofA Merrill Lynch are the lead underwriters on the deal, which is expected to price during the week of November 14.

Ultimately this is an interesting concept company where the internet solves a problem that every consumer faces. Unfortunately, it's a problem that consumers just don't appear willing to pay up to access. Angie is spending an insane amount of money to obtain members.

This appears to be a company that isn't ready to list on the public markets. Though who can blame them if the market is willing to pay nearly 10x revenue for a company that has never made profits?

With the limited amount of internet IPOs in the last decade, maybe it's just as well that ANGI lists on the NASDAQ. The investment options in the sector are limited considering the growth opportunities. Not to mention that other internet companies like GRPN and ZNGA are only going public after achieving a multi billion dollar valuation leaving very little growth for the public market investor.

ZNGA for example has mulled a valuation that at times has matched that of the largest public game maker in Activision Blizzard (NASDAQ:ATVI). Hasn't all the money been made already?

Yelp, which provides user reviews of top retail, entertainment, and service providers, plans an IPO that might value the company at up to $2B. DailyFinance has a good article detailing how all the media coverage regarding the planned IPO fails to discuss profits. The only speculation is that the company might generate $100M in revenue in 2012.

Maybe Angie should go ahead and list, but investors will be wise to avoid investment in this company at the proposed valuations and instead look into using the service.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Please consult your financial advisor before making any investment decisions. The above article is provided for informative purposes only.