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In the last month, the price for shares of Angie's List (NASDAQ: ANGI ) has absolutely collapsed. The company offers paid subscribers access to reviews of local service professionals and is under extreme pressure to show that paid memberships outweigh the free reviews on sites such as Yelp (NYSE: YELP ) .
The user review sites both came public around the start of 2012 with valuations in the general $1 billion range, but after the recent weakness in Angie's List's price the stocks have vast discrepancies making them worth another review. The recent declines in Angie's price should also be a major warning that Yelp investors should never get too comfortable. The fundamental case for either stock can shift quickly.
Price cut fears
While Angie's has always presented the benefits of premium reviews due to verified and paid subscribers over the anonymous reviews of other sites, the company recently got a ton of negative press regarding price cuts to its membership fees. Though it apparently was only a test in several key large markets, it brought up a greater fear among investors regarding the lack of members and hence reviews compared to Yelp.
Considering that Angie's List now obtains substantially more revenue from service providers advertising on the site, the key goal has to be increasing members above the current 2 million level while not diminishing the premium concept achieved via paying membership fees. The company really needs to ensure it has scale both in size of members to attract advertisers as well as scale in number of reviews to make additional markets relevant.
The company obtained 73% of revenue from service providers in the most recent quarter, leaving little doubt that switching up the membership fees to attract more verifiable users is clearly beneficial. Obtaining $20 a year less from new members could be made up via higher advertising fees at the current ratio of nearly $80 per subscriber.
One possible explanation for the price cut is that it could have been a test to see if the company could attract new members who are afraid of fake reviews on Yelp and Google (NASDAQ: GOOGL ) . New York regulators recently announced a comprehensive crackdown on 19 companies that had misleading practices of creating fake reviews on Google, Yelp and Citysearch.
The good news for Yelp is that it has never been implicated in the fake reviews, but the inability to prevent them questions the long-term benefits of the anonymous review services. Yelp itself claims that 20% of the reviews are "suspicious."
Angie's List can't claim total independence, however, considering questionable service provider search rankings that lead members toward the service providers that pay the higher advertising fees. Several studies, including one from Consumer Reports, suggest that service providers unwilling to pay the advertising fees fail to show in searches. This practice that could leave members questioning whether the membership fees are worth it.
With Angie's List plunging from an all-time high of $28 to around $16 today, the value proposition might finally be compelling. The stock is now worth less than $1 billion, compared to the massive $4 billion valuation of Yelp. The interesting part is that Angie's hasn't seen any fundamental shift in the growth metrics recently. It's possible that the fundamental metrics shifted dramatically during the third quarter when the stocks went their separate ways, but it has only been two months since both provided guidance for the unreported quarter.
Angie's forecast revenue for the recently ended third quarter at $65.5 million to $66.5 million for 57% growth, while Yelp only forecast revenue of $58 million to $59 million for 61% growth. Yelp has slightly higher growth, but it still isn't showing any fundamentally better results which suggest that Yelp is going to be the long-term winner.
Any revenue from Google reviews gets lost in the massive revenue buckets of that company, so one can't easily make a comparison with it.
Ultimately, the market is suggesting that the local review market will end up in a typical 80/20 split between the top two providers. In that scenario, Yelp has already been deemed the winner even without showing a fundamental reason for making that claim. The services offer vastly different focuses, with Angie's reaching service providers and Yelp having a more retail focus.
Yelp has the advantages of a larger user base and set of reviews, but it struggles with the quality of reviews and advertisers so far have been keen to make that distinction. Long-term investors need to be careful in throwing away Angie's List while subscribing to Yelp as the winner in this sector. Angie's List may indeed get back up to claim a stake in this competition, leading to a stock rebound.