We recently wrote on how Facebook (NASDAQ:FB) has the potential to take over both Yelp (NYSE:YELP) and Angie's List (NASDAQ:ANGI). We pointed to an overlap of Services and Place as the tool FB would use to be a business and services discovery hub. Since then, ANGI has knocked down its paywall and we believe this is a signal that the company views FB as a serious threat in the local business and services discovery space. While we believe knocking down the paywall is the right move for ANGI, we view it more as an affirmation of FB's consolidation plans than anything else.
Our bull thesis on FB's consolidation plans remains strongly intact due to FB's size, both from a financial standing (more capital than other players in the space) and a user base standing (more users than other players in the space).
ANGI has 10-12 million unique visitors per month vs. FB's 1.6 billion monthly active user base. In other words, for every person that visits ANGI each month, 160 use FB. ANGI also has only 3.3 million paid members, and while this is up 8% Y/Y, it shows drastically slowed growth from the 22% member growth rate in 2014. The average membership renewal rate last year for ANGI was 76%. This is up from 74% in 2014, but still indicates a rather high 24% membership churn. Granted, knocking down the paywall will unequivocally increase traffic and bolster ANGI's monthly visitor numbers in the near term, but this spike will almost surely keep that figure significantly below FB's 1.6 billion MAUs.
As we have said before, consolidation onto FB's platform here makes sense from a consumer standpoint. To avoid repeating ourselves, we will simply quote from our last article to briefly capture our sentiment here:
Individuals on Facebook post about everything from what they eat to where they shop to how they feel. Facebook posts cover the gamut of options, and service review is no exception. Facebook recently announced that it has more than 50 million active business pages that collectively receive 2.5 billion comments each month...On Facebook, though, you can see how many "likes" the place has, how many people have "checked-in" there, and which of your friends have been there. Perhaps most importantly, you can browse through all of the Facebook posts related to the location. This is all in addition to the reviews of the service. There is plenty of data on Facebook that platforms like Yelp cannot offer. In essence, a local business search and directory ads service fits perfectly into Facebook's platform, which is simply a collection of more a than billion people's thoughts about everything.
On the capital front, FB is much more financially equipped to launch a platform more comprehensive than what ANGI currently offers or plans to offer in the future. ANGI is aiming for revenues of $345 to $355 million next year, while analysts are looking for FB to net $25.5 billion in 2016 revenue. ANGI expects free cash flow to be breakeven in 2016, while FB netted $2.1 billion in free cash flow in 4Q15 alone. While FB's cash is certainly invested into multiple aspects of the business aside from business discovery, we believe that FB's access to significantly more capital puts it at an immediate advantage over ANGI to create a more comprehensive platform.
We think it is also important to note here that ANGI has 54.4 million participating service providers, which is roughly unchanged Y/Y and more or less equal to FB's 50 million active business pages. ANGI believes that knocking down its paywall will give it greater access to service providers, and while this may be true in the near term, we think that service providers will be more attracted to use FB in the long term. This is again an issue of size. FB will put the service in front of 1.6 billion monthly users, while ANGI will put the service in front of 10 million monthly visitors.
While knocking down the paywall will likely provide a near-term boost to ANGI's business, we think the long-term story here remains unchanged. We believe FB will add a feature to its platform (some overlap of Services and Places) that will ultimately consolidate this space and create significant churn for platforms like ANGI/YELP.
Disclosure: I am/we are long FB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.