Should You Buy This Company After a 45% Drop?http://www.fool.com/investing/general/2013/10/28/should-you-buy-after-a-1-month-40-loss.aspx Brian Nichols
October 28, 2013
Angie's List (NASDAQ: ANGI) has seen its price nosedive by 45% in October, showing how quickly the tide can turn for momentum stocks. But while the stock's performance could serve as a potential industry warning, is Angie's List now presenting value?
Then, the company announced it was running a "reduced-price test" for subscriptions to gauge its impact. As we saw with Netflix a couple years back, sometimes the market views changing subscription prices as a sign of concern.
However, the ultimate stock-crushing moment came on Oct. 23, following Angie's quarterly report . The company slightly missed estimates on both the top line and bottom line, but apparently, given the cautious events before earnings, investors were taking no chances, and shares fell nearly 15%.
As a result, we are now looking at a stock that has fallen from $24 to nearly $13 in less than a month.
Nonetheless, when we put all rumors and speculation aside, there are only two numbers that really stick out to me: 56% and 4.3.
For Angie's List, 56% is the rate at which revenue grew year over year in the last quarter, and 4.3 is Angie's multiple on annual sales. Hence, with 56% top-line growth, Angie's List trades at 4.3 times sales.
To put this in perspective, Zynga (NASDAQ: ZNGA) is soaring higher by double digits after reporting third-quarter earnings. However, if you look at the two reports side by side, not knowing the company by name, it's clear who had the better quarter.
In the third quarter, Zynga's bookings (revenue) declined 40% year over year. Moreover, the online game company saw its daily active users decline 49% year over year and saw a 48% drop in research and development spending thanks to job cuts. Yet, despite all of these year-over-year declines, investors are buying the stock, while selling Angie's List.
Granted, no two companies are valued the same, and since stock performance is a reflection of earnings and expectations, it is possible that Zynga was valued to such a lower degree that its fundamental flaws could be seen as a positive. However, at 2.5 times sales, Zynga is not too much cheaper than Angie's List when considering that many in the space trade at 15 to 20 times sales. This disconnect between stock performance, fundamentals, and valuation might suggest that Angie's List is a good buy on the dip.
A clear disconnect