Has nobody looked at the latest financials from Angie's List (ANGI)? They issued financials and a quarterly report this week that appear to be an utter catastrophe, yet the stock rose 25% from $9 to about $11.50 in response.
Angie's List runs a website with reviews of dentists and plumbers. The reviews are "crowd sourced" which means they come from actual customers who contribute to the site. Yelp.com, Wikipedia.com and YouTube are other sites that are crowd sourced. Angie's list is different from most sites of this type because they charge an annual fee.
Despite continuing losses, Angie's List management is upbeat. Angie's List CEO Bill Oesterle, as he introduces this quarter's report, says:
"We are having a very good year. Third quarter was our 43rd consecutive quarter of record revenue. Household acquisition costs and renewals were excellent.Advertising sales were even better. First year advertising revenue originations have grown 106% year-over-year. In addition, service provider revenue renewal rate remained over 100%. This dynamic should contribute significant additional margin in the coming quarters."
Ignore the spin from management telling us what a great company this is and how fast it's growing. This company is a complete train wreck. The problem is they are burning cash at a frightening rate.
The sales pitch management has placed at the top of their press release is hugely misleading. The truth is found by reading the statistics and accounting buried in small print further down the page.
How long until they run out of cash?
It's worth reading the financials in detail. The complete report is available on their website under investor relations.
Let's start with the income statement, hidden near the bottom of the press release. Losses for the first 9 months of the year grew from $43 million in 2011 to $55 million in 2012. 3 months period losses increased from $17 million for third quarter 2011 to $18 million for the same period in 2012.
This gives us an average monthly loss of around $6 million, depending on which of these numbers you use. The monthly loss seems to be getting a little worse, not better.
Next let's have a look at the balance sheet. Cash is down from $88 million to $65 million. Assets are down from $111 million to $101 million. This is the money they have available to pay their bills.
The situation is worse if you look to see how much of that money is actually available for spending. Net worth was $45 million last year. This year it is down to $1.7 million, which is pretty close to zero, considering the accuracy of the numbers. Not a good place to be.
We know they are losing money, so how are they still open? They're borrowing. Current liabilities have increased from $46 million to $80 million, and now exceed current assets. Total liabilities have increased from $65 million to $100 million.
How long before impact?
If we ignore the current liabilities and lose $6 million a month, $65 million will last ten months. The total value of all assets ($101 million) will be expended in 14 months. Subtract the liabilities and you are broke today. Don't take my word for it, check the financials yourself.
It's no wonder this company's CEO wants to sell his office building to the company. They're not going to be a tenant for long. The financial statement discloses this inside deal with a ticket price of about $5 million.
What's Wrong With This Business?
There are a couple of basic flaws in Angie's List as a business. First, they don't deliver the product they advertise. They claim "Companies can't pay to be on Angie's List" on the main page of their website, yet advertising from "service providers" is their main source of revenue. Online discussions include many complaints by plumbers and dentists who felt pressured to pay Angie's List for placement. Google "Angie's List" and you will find many customers and service providers who are outraged at this practice.
The second problem is that there are other sites that offer the same thing without charge. Craigslist.org offers free ads which service providers can use, and Yelp.com offers a crowdsourced review system, but without an annual membership fee. Yelp also seems to have a lot more reviews (bigger audience and bigger database) than Angie's List.
Granted many people are still on the learning curve, but as consumers become better informed, Angie's List is going to be under a lot of pressure from free services offering a better product.
Is it important to make a profit?
It seems like nobody learned anything from the Tech Bubble a few years ago. Remember all those businesses that were trying to corner the market on something or other, got gigantic market share, and forgot that the purpose of a business is to make a profit?
The management at ANGI aren't even trying to make a profit. Last year their business plan involved high fees for membership ($30 a year is a lot when you compare to YELP which is free and offers pretty much the same thing). Cost for recruiting these customers is somewhere between $72 and $ 90 each. Angie's List continues to try to recruit as many members as they can, yet the more members they recruit, the more they lose. That just isn't a business plan.
Between last year and this year, not much has changed, and it appears they are going to continue the same plan next year. There does not appear to be any economy of scale and they're not really developing new technology.
At its core Angie's List is a pretty standard social website with a lot of reviews. The computer code for something like this not complicated and does not justify millions of dollars of development cost. So, they've taken this one website, and a business plan that doesn't make any money, and they've expanded it around the country so they can lose more money faster.
Optimism is not a replacement for a solid business plan
Charging membership fees for websites doesn't seem to be a viable business plan in the long run. Others such as the New York Times have tried it and it doesn't seem to be working. People expect everything online for free.
Contrast the financials of ANGI with a more solid business run along traditional lines, such as Apple Computer (AAPL), Ford (F) or Boeing (BA). All of these make a solid, good quality product which they are able to sell at a profit. All of these have a price to earnings ratio (P/E) that reflects the value of the business and its potential to make a profit.
Apple, for example, has a P/E ratio of about 15. This means $15 invested gets you a dollar of profits for Apple, while $2.30 gets you a dollar of profit for Ford. This means Apple is considered a better bet, and Ford is considered risky. ANGI doesn't even have a P/E ratio, because they don't have any profit.
The question to me is why people think Angie's list is so much better as an investment than Apple? Investors who buy into Angie's list are contributing to a party that looks like it will end sometime next year with bankruptcy, while Apple owners have a share in a profitable ongoing enterprise.
Conclusion: ANGI is a train wreck in progress
Ignore the sales pitches and the slick guys with nice suits and Italian loafers telling you about this great investment opportunity. This is a classic example of why companies are forced to release their financial records under GAAP rules. Sales guys will paint everything pretty, but the truth in the accounting is pretty grim.
I personally have a short position in ANGI. I think the argument is pretty strong to take any investment out of ANGI and put it in a company like Apple or Boeing that has some reasonable plan to make a profit.