Readers of my earlier pieces on Angie's List (NASDAQ:ANGI), available here and here, are aware that I am highly skeptical of ANGI's overall business model and suitability as an investment. In those pieces, I highlighted a number of red flags that indicate that ANGI's business is facing major difficulties and is likely to be a strong underperformer in the months ahead. For those unfamiliar with the various red flags and arguments against an investment in ANGI, I suggest reviewing my articles as I will not rehash all the points here.
In Part 1 of my series on ANGI, I touched upon and provided evidence of a number of customer complaints regarding ANGI's questionable membership renewal practices, which I believe cross the line into being unethical. In this piece I will examine another critical red flag which could have major negative implications to ANGI's existing revenue base, cash reserves, reputation and future business potential.
ANGI is Currently the Defendant in a Federal Class Action Lawsuit Alleging Illegal and Abusive Business Practices Relating to Membership Renewal
Although the internet is full of complaints regarding ANGI's business practices, some examples of which are available here, here and here, until recently the actual risk to ANGI's business from such consumer testimonials was unclear, although obviously the company's reputation could be harmed by such actions. This equation has changed significantly during Q3 2012, after ANGI was named as the defendant in a federal class action lawsuit regarding illegal and abusive business practices, some of which regard the very complaints outlined in the customer testimonials linked above.
A full copy of the federal class action lawsuit is available here. While, I highly recommend everyone read through the document themselves, I will also provide a summary. ANGI is being sued for two counts of Deception, two counts of Unjust Enrichment, and two counts of Breach of Contract as it relates to membership renewal practices between 2006 and 2012. The suit alleges that:
- When a new member signs up for a membership, ANGI quotes an applicable "Membership Fee".
- New members must agree to automatic renewal of their membership and keep a valid credit or debit card on record.
- The Angie's List Membership Agreement states that automatic renewal is to be billed at the "The Membership Fee".
- ANGI breaches this contract and instead automatically renews members at a distinct, higher "Membership Renewal Fee".
- ANGI has breached its membership contract in excess of 1 million times.
- In 2010, ANGI altered its business model to offer new members the option of memberships limited to services covering: Home Contractors; Healthcare Providers and Auto Service Providers. As part of this process, ANGI created an "Angie's List Bundle" subscription that provided access to all 3 areas for a premium price.
- ANGI abused its existing members by not informing them of the changes to the membership offerings, instead opting to automatically renew existing members at the highest-cost "Bundle" package.
- ANGI never obtained consent or agreement from its members to pay this premium rate for the "Bundled" services.
- The practices outlined above have lead to ANGI's Unjust Enrichment during the time period from 2006-2012.
- ANGI engaged in Fraudulent Concealment during the time in question as it relates to the practices outlined above. Through a number of deceptive practices and techniques of secrecy, ANGI prevented the exercise of reasonable consumer due diligence.
The lawsuit seeks between 1 and 3 times the actual damages incurred by the Plaintiff and members of the Subclasses across the various counts. Further, the suit seeks to recover the costs of the action, reasonable attorney fees, expenses incurred by the Plaintiff and Subclasses in order to obtain and recover a judgment.
ANGI Has Not Disclosed the Existence of This Class Action Suit to Shareholders
To add insult to injury, despite a time stamp indicating that the suit was filed with an Indianapolis court on August 14, as of today, more than two months later, ANGI has still not disclosed to investors the existence of this highly material lawsuit or outlined the potential risks to the company associated with it. This is highly questionable from a disclosure and corporate governance standpoint and suggests that the company, generally speaking, will seek to avoid reporting bad news to investors. This appears consistent with the company's tendency to use deceptive and aggressive accounting metrics as outlined in both Part 1 and Part 2 of my series on ANGI. Investors should be highly circumspect in approaching the shares of a company which appears to hold such contempt for timely and straightforward corporate disclosure.
Sell-Side Research Analysts Remain Conspicuously Silent on the Matter of the Lawsuit - Are They Even Aware it Exists?
In Part 1 of my series on ANGI, I outlined how research analysts employed at investment banks that conducted financing deals for ANGI were overwhelmingly positive on the stock, despite the numerous red flags indicating the company is facing business difficulties and the shares are extremely overvalued. They continue in the same vein with respect to this highly material class action lawsuit against ANGI. Thus far, in the period from when the class action lawsuit was filed until today, not a single sell-side research analyst has come out and publicly addressed the issue and/or potential implications of the suit. This conspicuous silence on what should be viewed a key risk to their investment thesis should be disconcerting to any and all who take their recommendations seriously. It ultimately begs the question: Did the sell-side research analysts even realize that the suit existed? If they have missed this key risk to their investment thesis, what else might they be missing? And if they knew about it and simply opted not to address it, then they are certainly doing a disservice to all of their research clients by not informing them of such a key, material risk to the company.
What Are the Implications to Investors?
Based on the size class (1+ million users) and scope of the allegations (~50% of renewal fees + punitive damages multiplier + legal fees, etc.), it is clear that this suit could have some serious and far-reaching implications for investors in ANGI's stock. It appears that if successful, this suit could cost ANGI tens of millions of dollars in penalties. Above and beyond the actual monetary costs, a judgment against ANGI would likely force the company to significantly change the way that it operates going forward. If ANGI is no longer allowed to force automatic renewal on its users, it could have major negative implications to renewal rates, since currently, members that are renewed automatically are counted within the renewal figures. It could also likely have significant effects on the average subscription revenue, since the figure currently appears as though it may be artificially inflated due to the abusive practices outlined. The company could also suffer irreparable damage to its brand, reputation and credibility as a consumer advocate in the eyes of subscribers as the lawsuit plays out. At the very least, the lawsuit promises to be a costly distraction to management at a time when the company is facing numerous other challenges and threats.
The class action lawsuit itself and the way disclosure of this material event has been handled to-date by ANGI's management together add yet another in a long line of red flags that I have revealed about this stock. The fact that sell-side research analysts have said nothing in their reports about the suit is an indictment of the quality of their work and the credibility of their overall positive investment thesis. This suit has the potential to cost ANGI tens of millions of dollars and irreparably damage its brand and value proposition. As such, the federal class action lawsuit against ANGI should be viewed by shareholders as an existential threat to the company and the share price ought to reflect the risk contained within it.
Disclosure: I am short ANGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am short ANGI and/or hold derivative positions which will benefit from a decline in the stock price.