Angie Has No Bottom

Angie's List (NASDAQ: ANGI  ) announced quarterly results that met the high end of guidance for revenue but indicated a change in the company's spending strategy that jeopardizes the investment thesis. Remember, even a growth story needs profit at some point in the future to justify its valuation. Does a dramatic increase in marketing signify that Angie's prognosis is terminal?

Angie's List revenues of $68.8 million were basically in line with expectations for $68.5 million but higher sales and marketing expenses caused EPS of $0.05 to be dramatically below expectations of $0.13. Sometimes a bad quarter is rescued by better than expected guidance, but expected first quarter revenues of $71.5 million-$72.5 million fell short of the $74.2 million that analysts were expecting. This was a disappointing quarter and may be an indicator of things to come, but you have to offer management kudos for being honest about the outlook. Frankness in dealing with investors, the true owners of the company, is a rare quality among management teams.

The big concern going forward is that the cost to acquire new subscribers is increasing, which jeopardizes the growth strategy and the big profit stream in future years. The company plans to continue to invest in experimental brand development via Search Engine Marketing and specifically guided "marketing spend" to $21.5 million-$22.5 million. This is having the result of forcing sell-side analysts to reduce EBITDA estimates substantially.

Short Hope
The company's leading indicators, which should be driving revenue, were strong this quarter and should be indicating future strength, not weakness:

Ending period members were 2.484 million with a net addition of 105,000 or 4.2%.
Service providers were 46,329 and up 29% year over year.
Service provider contract value was $194 million, up 46% year over year.
Churn of 1.6% was down from 2.3% in September.
Advertising revenue per service provider was $1,119, up $10 from September.

The growth in these metrics may have been below some analyst's expectations, but it indicates hope and hope can be a dangerous thing. Hope spurs a management team to spend more to enter lower-margin markets and embark on increasingly risky projects to keep the dream alive. We all admire people who take risks successfully, but we don't want gamblers to manage our money.

Competition may be destroying Angie's business model
Competition is increasing both at the low end and the high end. Companies like Yelp (NYSE: YELP  ) have been given a pass on valuation (for now) as they continue to build out geographies and sectors that they focus on. Today people go to Yelp for restaurant reviews but what about plumbers? If you live in Westport CT, and search for plumbers, 143 free business listings come up and Schede Plumbing and Heating (based in a town close by) paid for the top listing. The cost for Yelp to enter this market is negligible and the competitive impact it could have cannot be underestimated since I didn't have to subscribe to get this information. 

Angie has no bottom
Like several other companies we've discussed in reviewing earnings reports, Angie's List doesn't have any profits to speak of so when future growth is discounted, stocks fall back to a multiple of asset values. Technology companies usually stabilize at 2 times cash (e.g. BlackBerry) which would put Angie's List at $1.90 per share. This is not what will happen, this is what could happen if the slowdown in subscriber growth turns out to be long term in nature rather than seasonal and the spending continues.

We want to leave you with a direct quote from the CEO during the Q&A session on the earnings call:

[We] believe we have a pretty good understanding of what the performance issues were in the fourth quarter but its impossible to know, the world is getting more competitive, we know that. And some of those competitors, they are increasing their offering.

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