Ahead Of Release, The Odds Are In Favor Of Angie's List

| About: ANGI Homeservices (ANGI)
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Summary

February announcement set to weigh impact of monetization waves.

Freemium offer marks a crucial point in growing membership.

Entry into more businesses will grow ANGI's reach, and growth will trickle down into investors' pockets.

Investment Thesis

Angie's List (NASDAQ:ANGI) is set to release its Q4 2016 results on Tuesday. At the time of writing this article, ANGI was trading at $6.55 at a market cap of $387.46 million. The release is expected to gauge the impact of strategic changes made in the last two quarters, particularly the shift to the freemium model.

At the time of its founding in 1995, Angie's List, Inc. was a physical database for locals to source contractors. After an injection of funding from venture capitalists and one acquisition of Unified Neighbors in 1996, the company shifted its database of services and reviews to the Internet. With time, and after getting more users, ANGI was expanded to offer healthcare and auto care services. Today, it has grown to a crowd-sourcing website of reviews on local businesses covering the US.

Trends and Forces in Crowdsourcing Industry

To a large extent, ANGI'S business model can be explained in the quote below:

The consumer is becoming a part of the world's biggest companies and agencies, which is a profoundly positive way to co-create value together. - François Pétavy CEO, eYeka.

Crowdsourcing is fast becoming an essential part of any business that aims to be ahead of competition. Its strength lies in allowing different skill sets to come together in creation of a particular product or service. In the case of ANGI, it allows consumers to give reviews on a business that they have engaged with and let potential consumers make comparisons.

I have been a keen watcher of ANGI with emphasis on its mode of operation, which I think will bear fruit in the next two or three quarters.

First, ANGI rolled out a freemium service in June, basically removing the fees for basic membership. This move, termed Wave 1 of monetization, saw an additional 2 million members between June and November. Previously, this figure would have been achieved in 1.5 years. More subscribers have led to a surge in engagement metrics, a key indicator of growth. Wave 2 involved adding more service providers onto the platform, which is key to revenue growth. This was also a successful feat, with the number of providers growing to 56,000 from 53,900 in the same quarter the year prior. Wave 3 involved increasing the rate of renewals among service providers. This will be evaluated after the expiry of the 12-month duration of the current contracts.

Outlook

The financial future of ANGI is currently determined by the success of Wave 1 and Wave 2. The removal of the paywall effectively means that anyone can get access to and read reviews without paying the previous $40 annual fee.

The last quarter saw a drop in revenue as a result of low membership and service provider revenues. By segment, membership revenue was down to $13.7 million compared to $17.2 million the previous year. Service provider revenue fell by $3.7 million to $66.1 million. The lower SP revenue was due to migration to the AL 4.0 platform and lower rates of renewals. ANGI hopes to embark on training new members on using the new platform while customizing ads and news according to the audience. Most users join ANGI to read reviews, without being fully aware of the e-commerce side of the business.

Currently, ANGI faces competition from HomeAdvisor, Better Business Bureau, Consumers' Checkbook, Amazon (NASDAQ:AMZN) and Yelp (NYSE:YELP). Prior to removal of the paywall, ANGI was trailing behind these companies in terms of accessibility to non-paying members - none of its competitors charge any membership fees. Going forward, it will gain lost ground, considering its size and the financial resources set aside to woe more users. For this, ANGI sunk some $15.6 million into launching the freemium product and streamlining its process on the new platform. Also, going into 2017, ANGI aims to undertake a $15-20 million reduction in cost, which will take part in Phase Two of the profitable growth plan.

Being a publicly-traded company, ANGI is under pressure to create value to its shareholders and reassure them of solid growth in the future. Currently trading at $6.55, I feel ANGI is performing below its true capacity. With the aforementioned changes, I would suggest that it widens its coverage to cover more businesses, which will in turn give the sought-after page views. These could be B2B reviews, website reviews and even airline reviews. This would open it to more paid SPs and capture a considerable number of the freemium membership.

The opening up of the platform through the freemium service was a huge step in getting the much needed membership numbers, traffic and originations, which are the fuel on which the ANGI train runs. A wider user base will also boost earnings from contractor advertising and direct referrals. As the market awaits the February announcement, the odds are in ANGI's favor. I believe that the sum total of the changes made in the last two quarters points towards a higher potential for penetration of new markets and the attendant revenues which of course are the goal of every investor.

Disclosure: I/we 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.