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Angie's List Knocked Down Again

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One thing for sure, the stock market is not very forgiving of growth stocks that miss earnings estimates, no matter the amount. In the case of Angie's List (NASDAQ: ANGI  ) , the stock continued a month-long collapse after a third-quarter earnings miss. The company that offers paid members access to reviews of local service professionals generated revenue growth of 56%, yet it wasn't enough to meet analyst estimates.

The company remains under extreme pressure to justify how paid memberships outweigh the free reviews on sites like Yelp (NYSE: YELP  ) . The difference in stock valuations signals that the market thinks the free versions with larger user bases are more valuable. However, investors need to remember that the market tends to overreact and a reversion to the mean could take place in 2014. Remember that Yelp spent most of 2012 in the doghouse trying to convince the stock market that user reviews were a valuable service.

Problems over stated
The biggest concern going into the earnings report was the fear that the company was lowering membership costs due to sluggish membership growth. On the earnings call, founder Angie Hicks did a solid job of explaining that Angie's List regularly tests membership dues. With membership fees declining in relevance, the company is more concerned about the quality of members, rather than the annual fees obtained for joining the service. The primary reason is that service provider revenue not only accounts for nearly 75% of revenue, but it is also growing faster at 66%. Even more encouraging is the 70% growth in e-commerce revenue.

Unfortunately, the company only guided to revenue of $68 million-$69 million for Q4. The amount is below analyst estimates and adds to the fears that lower membership price tests are a sign of desperation. In reality, cohorts that are at least six years old generate over $100 in service provider revenue per member. Clearly, the numbers reflect that a member who pays only $10, yet drives $100 in additional revenue, is preferable to having that customer avoid the service entirely because of the membership fee.

Reversion to the mean
Investors looking at the sky-high prices of Yelp and the recent collapse of Angie's List should probably consider the reversion to the mean theory. These companies don't typically compete head-to-head, suggesting a multiple valuation difference shouldn't exist. Yelp presents a better platform for the casual restaurant or entertainment venue, while Angie's captures the service providers involved in expensive and time-consuming maintenance and repair projects. In essence, consumers will trust random people on a $20 dinner, but they want trusted sources for a $2,000 plumbing repair. Considering these facts, Angie's List and Yelp could theoretically work in tandem, making a reversion back to similar valuation multiples a high possibility.

TripAdvisor goal
Both Angie's List and Yelp hope to earn the title of the top consumer review site. In the case of TripAdvisor (NASDAQ: TRIP  ) , it is the leading provider of consumer reviews for the travel industry. The company is approaching revenue of $1 billion and already has a market cap that exceeds $10 billion. Both Angie's List and Yelp should work in tandem, causing the stocks to revert back to similar valuation multiples.

TripAdvisor had the good fortune of benefiting from the travel industry's quick embrace of Internet-based capabilities by both consumers and service providers. The TripAdvisor numbers shed light on why Yelp currently has a valuation of over $4 billion while still reporting losses.

For Q3 2013, TripAdvisor generated a $65.3 million profit and an incredible free cash flow of $129.3 million, or 51% of revenue. The company generated 20% growth to reach a $255 million revenue base. These are all good signs indicating that Angie's List and Yelp may reach lofty profits in the future.

Bottom line
With the market continuing to punish Angie's List, the stock should be more compelling to investors. Consumer review sites have years of growth ahead before even bumping heads. The membership additions hit a record high during Q3, yet investors are more concerned about slightly missing revenue guidance. Once the market shakes out the stock over the next couple of weeks, it could provide the similar bargain offered with Yelp last November. Remember that Yelp traded around $16 last year when investors were convinced that it was the second coming of the failed Groupon and Zynga IPOs. Angie's List might be down again, but it certainly isn't out for good.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2013, at 4:07 PM, caaaad wrote:

    They are very poorly managed. They use questionable tactics with coupons. They are arrogant and aggressive with their providers. Their coupon offers are for them.

  • Report this Comment On October 27, 2013, at 6:45 PM, Ostrowsr wrote:

    Does anybody else not get this Angie's list site? Pay a monthly fee for advice that you need maybe once a year at best?

  • Report this Comment On October 27, 2013, at 9:14 PM, kimand2cats wrote:

    A friend of mine tried to put a good review of a company on Angie's list and they contacted the company and said they had to pay to belong to Angie's list in order for them to post the comment. But the TV commercial says that a company cannot pay to belong. What? Hopefully this Angie's list thing is a passing phase and they will be gone.

  • Report this Comment On October 28, 2013, at 1:18 PM, Havenotimeyet wrote:

    The author of this article is a fool also, must have a position that is down considerably. The model doesn't work and won't ever....this is why they "test", they have no clue how to run a business. I feel sorry for those who might rely or put credibility into article like this! Short the stock...Muddy Waters is!

  • Report this Comment On December 16, 2013, at 3:31 PM, ServiceGEMS wrote: is completely free for homeowners. We connect homeowners and property managers to local, top rated contractors. We operate in most cities in both Canada, and the US. I guarantee will satisfy you as a homeowner, and if you aren't satisfied there are no contracts binding you whatsoever. -This is the link to the ServiceGEMS homepage. It is extremely user friendly from both a contractor and homeowners standpoint.

    If Angie's List isn't delivering the results that you expected, give ServiceGEMS a try.

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Related Tickers

9/26/2016 3:17 PM
ANGI $10.07 Down -0.18 -1.76%
Angie's List CAPS Rating: *
TRIP $61.82 Down -0.05 -0.08%
TripAdvisor CAPS Rating: *****
YELP $39.43 Up +0.05 +0.13%
Yelp CAPS Rating: **