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  • Angie's List: Uniquely Positioned To Fail

    Angie's List (NASDAQ:ANGI) is a web-based company that provides consumer reviews of local services all across the United States. The company seeks to create a positive, constructive environment for those who are seeking certain services (plumbing, household remodeling, surgery etc.) and for those who are providing these services. Angie's List was founded in 1995, went public in 2011 at $13, and has recently been trading in the mid to high twenties. The stock has been divisive, with a number of cheerleaders (mainly Wall Street) and a vociferous group of naysayers. Short interest has been increasing since early June and approximately 24% of the float is currently short. It is my opinion that the short interest is justified because as of today, Angie's List has a weak business model, strategy, and a valuation that's unsustainable.

    Business Model

    Pay for Content

    From the very beginning, Angie's List has employed a subscription-based pay-for-content model. Although many technology enthusiasts have blasted this model as ineffective, this has actually worked very successfully for media outlets such as the NY Times - its CEO recently called it the "most successful decision" in years (http://paidcontent.org/2013/05/20/new-york-times-ceo-calls-digital-pay-model-most-successful-decision-in-years/). However, for news and other information that consumers access daily or weekly, it makes perfect sense.

    Angie's List is in the business of helping consumers purchase "high cost of failure" services such as home remodeling, plumbing, roof repair, and automobile repair. How often do consumers need these services? Once in a while, so there isn't a great life time membership value proposition. With full and perfect knowledge, it is highly impractical for users to repeatedly buy into a service for inconsistent, one-off needs. Post-high risk purchase, consumers experience a tremendous value loss. Also, given the number of other similar free services (Yelp, HomeAdvisor, Facebook etc.) - Angie's List has limited scalability.

    Unreliable Affinity Network

    Angie's List's SEC filings repeatedly refer to its lack of "anonymous" reviews as its service differentiator. However, most social media and consumer review sites (Facebook (NASDAQ:FB) Yelp (NYSE:YELP)) currently have anti-fraud specialists that monitor for this type of activity so this isn't as much of a concern today as it was in the past. In addition, as a consumer, if I learn that John Smith from a neighboring town recommends a contractor - why would I rely on the review of a person I don't know? This person is just as good as anonymous. It is customary today for people to employ their own social networks to seek out advice and counsel before making significant purchase decisions. Anecdotally, I'm sure most people have witnessed their peers on Facebook asking for recommendations before. Not only is this practice free, but it gives the consumer a higher value proposition - a trusted friend's recommendation is better than a random one.

    Poor User Demographics

    Angie's List's target demographic and user base are homeowners aged 35 to 64 with household incomes of $100,000-$200,000--an equal mix of men and women. The median age of an Angie's List customer is 50. This user base appears to be relatively affluent, time crunched, and probably technologically unsophisticated. Hence, as of now this customer base may be comfortable and wealthy enough to pay for content that they're not actively engaged in on a day to day basis. However, this is the "new to the internet" user base that Angie's List relies on. This is a dying user base and the company is poorly positioning itself long-term by expecting a similar adoption and user trend in the future. I would be very surprised if the average soon-to-be-affluent 30 year old of today will convert into an Angie's List customer five years from now. Will the 25 year olds of today pay to join Angie's list in ten years? No chance.

    Strategy

    National Advertising

    Angie's list pumps millions ($80 million in 2012) into television advertising designed to bring consumers to their website. Apparently "word of mouth" advertising by itself wasn't sufficient enough to acquire new users. This effort to target TV watchers to draw them to an internet site is antiquated, especially for a purported technology company. Also, potential future customers in the 20-35 age demographic who watch less TV than their elders are basically ignored by this strategy.

    While ANGI's peers in the consumer internet world are strategizing how to successfully manage the transition from desktop to mobile - Angie's List is still fighting yesterday's battle. Unfortunately, based on its lack of day-to-day use - there is no real need for a mobile strategy. ANGI has no real ability to compete and win business in the growing mobile space. Mobile apps are great for services consumers use constantly, and Angie's List doesn't fall into that category.

    Lack of Innovation

    Angie's List has failed to turn a profit while employing basically the same strategy for 18 years. Management's belief in its higher perceived review quality and its notion that consumers are willing to enter into long-term recurring subscriptions for infrequently used services - is very misguided. The company stubbornly refuses to cater to the norms of today's consumer internet.

    Angie's List clearly hasn't yet learned how fickle subscribers can be. In 2011 Netflix (NASDAQ:NFLX), an innovative company with a loyal following learned that despite its quality -- users can defect en masse when met with pricing pressures. Thus, It's very difficult to see how Angie's List can effectively expand its user base, reduce its heavy marketing expense, and maintain the pricing flexibility necessary to generate reasonable operating margins in the future.

    Finance & Valuation

    Revenues

      201020112012
    Service Provider$ 33,890$ 56,288$ 108,082
     % Growth 66%92%
         
      201020112012
    Membership$ 25,149$ 33,815$ 47,717
     % Growth 34%41%
         
      201020112012
    Total Revenue$ 59,039$ 90,103$ 155,799
     % Growth 53%73%

    Source: SEC Filings

    Angie's List's service provider revenue stream is significantly larger and has grown faster than its membership revenues. Unless membership continues to experience aggressive growth, there will likely be a future impact on service provider revenue. If service providers find that there isn't a growing well of new business, they'll likely decide to save their money and defect.

    Although the revenue figures appear to suggest positive growth, it's prudent for investors to assess the "quality" of the revenues and if they can be replicated in the future. Angie's List has recently been recruiting customers by offering discounted subscriptions and other promotions. I would imagine this helps to explain some of the significant growth in users and revenue from 2011 to 2012. The question is, once these promotions are over, and the annual membership fees get bumped up - will the users stick around? And after that, will they pay higher membership fees when their markets become more fully penetrated? Possibly, but definitely a hard sell.

      201020112012
    Marketing Expense$ 30,237$ 56,122$ 80,230
     % Growth 86%43%
    Selling Expense$ 16,892$ 33,815$ 58,596
     % Growth 100%73%

    Source: SEC Filings

    In 2012, ANGI spent $73 to acquire each new user ($80,230,000 marketing expense/1,092,935 gross paid memberships added). This is nearly four times the average revenue per paid membership ($19-$20). Unless the lifetime value per average customer exceeds $73 (3-4 years membership) and continues growing loyally, the company won't appreciate sustainability. And given Angie List's current strategy, it isn't easy to see how they can reduce their bloated marketing expenses while continuing to substantially increase its member base.

    Valuation

    At its current price ($26.85) and $1.56 billion market capitalization, ANGI appears to be highly overvalued. ANGI has a price-to-sales ratio of 10 - five times the NASDAQ 100. This makes very little sense given its performance. I don't view Facebook or Yelp as great valuation comps because both are positioned to compete in the evolving consumer internet space. Zynga (NASDAQ:ZNGA) seems to be an appropriate distressed, consumer internet comp for ANGI, and it trades at 2x sales. All things considered, I think ANGI should reasonably trade in the $4-6 range.

    Conclusion

    Angie's List's weak business model renders it uncompetitive in today's consumer internet economy. ANGI is not "disrupting" as its proponents suggest, it is merely clinging to outdated business practices. The company has been operating now for eighteen years and remains unprofitable. Similar to a host of other failed web startups, ANGI's less than compelling value proposition in conjunction with its poor market timing will eventually lead to its demise. As of now, ANGI is being artificially promoted by Wall Street analysts and their short-term outlooks. Still, this is just noise and all the positive reinforcement in the world will not change a delicate business model. Although I would not be surprised to see ANGI trade higher, even into the low $30s in the near term - without a boat-rocking strategy change, it will fall in the long-term. This may take some time to pan out but the market will eventually show its true colors. Thus, ANGI is an excellent short and hold opportunity.

    Disclosure: I am short ANGI. 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.

    Jul 24 5:12 PM | Link | Comment!
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