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Should Investors Stay Off Angie's List?

http://www.fool.com/investing/general/2013/10/24/should-investors-stay-off-angies-list.aspx

Michael Lewis
October 24, 2013

Angie's List (NASDAQ: ANGI) may claim its clients love the access to vetted professionals -- from plumbers to anesthesiologists -- but the company and stock are a bit more difficult to feel positively about. The Web-based subscription-referral business trades at more than 50 times its forward earnings and has been accused more than once of using murky business practices. On Wednesday, shares fell even though the company met the Street's expectations on the top and bottom lines, but it failed to satisfy forward-looking estimates. The company needs to reign in its expenses and improve public perception before investors will take to the rich earnings multiples implied in Angie's stock price.

Review
Shares were down nearly 8% after hours on Wednesday due to Angie's List's just-ended quarter. The company lost a net of $13.5 million in its fiscal third quarter, or $0.23 per share. Analysts had been expecting $0.03 better. Revenue was less disappointing at $65.5 million, where analysts were expecting $66.1 million. The net loss also comes in as a decent improvement over the prior year's loss of $0.32 per share.

To end the year, Angie's List is looking at top-line sales in the neighborhood of $68 million to $69 million, whereas the market wanted $70 million.

The two misses, EPS and guidance, were not too damning, but analysts are concerned that the company is struggling to control its costs, prompting the major sell-off. In the third quarter, marketing expense ticked up another $2 million to $28.2 million. Management guided for lower marketing spend in the final quarter of the year.

Where it stands now, Angie's List offers investors little in the form of cash flow and a business model that may depend too heavily on aggressive sales and marketing practices -- all for a price (see above forward earnings ratio) that rivals even some highly profitable technology businesses. Do the bulls know something the rest of us don't?

Questions
In the last year, Angie's List has come under fire by outspoken short-sellers, such as Citron Research. Citron alleged the company's customers were increasingly dissatisfied with the service, and alleged that the so-called evaluation process of its chosen businesses was simply a matter of taking a check in excha