Angie's List Is A SEO House Of Cards

| About: ANGI Homeservices (ANGI)
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Angie's list (NASDAQ:ANGI) is an online business that provides reviews and recommendations for home and medical service providers. Angie's list makes money by charging customers access to their platform and it charges service providers for premium features that help drive more leads to the service provider.

At the time of writing Angie's list has a market cap of $1.4 billion. On April 24th, 2013 Angie's list released the quarterly report for Q1 2013. They offered guidance of total revenue in the range of $58.5 million to $59.5 million and marketing expense in the range of $27.8 million to $28.8 million, which is an increase from Q2 last year revenue of $36.5 million and marketing expense of $27.6 million. In the Q1 2013 earning call they mentioned the efficiency of SEO when explaining why their marketing expense guidance is only slightly higher than Q2 2013. For these reasons I believe that Angie's List is relying on this free SEO traffic to meet these guidance numbers.

Let's take a look at Angie's List's impressive SEO growth. Note the top line in the graph below is 2 million search engine visitors. Recently SE traffic has started to decrease, but is still way up YOY.


This is even more impressive when you look at their overall traffic. It is clear that free SE traffic is becoming a bigger slice of their traffic mix.

Angie's list's is relying increasingly on this SE traffic to maintain growth and even stated in their most recent earnings call that they expect to be cash flow positive in 2013.

Let's take a look at where this SE traffic is coming from. I did a search on Google (NASDAQ:GOOG) for "Best Plumber Norfolk, VA". You can replace plumber with doctor, electrician, etc, and you can replace Norfolk, VA with another locality and you are likely to see an Angie's List search result, and all of the pages use the same template. Here is a screenshot:

This is a landing page that Angie's List uses to try to convert this search engine traffic into paying members. I believe that Google has been too kind to them recently and this page is not of value to a person searching for "Best Plumber Norfolk, VA" or any similar search, and Google will soon adjust their algorithm to favor other pages like Yelp (NYSE:YELP) or other services which offer these type of reviews at no charge.

They are currently enjoying about at least million of these free leads per month, which if you assume a 2-4% conversion rate to paid Angie's list members accounts for at least 60k - 120k subscribers a quarter.

I have no position in Angie's List but will be short when this SEO house of cards starts tumbling down.

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