Match Group (MTCH), the parent of online dating brands including Tinder, OkCupid, Hinge, and its namesake, has been a breakout winner on the market since its 2015 IPO, with the stock nearly quadrupling since then.
Under the guidance of majority shareholder IAC/InterActiveCorp (IAC), Match Group has grown effectively, both through a classic "roll-up" strategy -- acquiring rival brands like PlentyOfFish and Hinge -- and by unlocking the power of Tinder through a subscription model. Match just wrapped up another strong year with revenue growing 30% and earnings increasing 36%, and it continues to have a promising growth path.
Now, IAC, which specializes in interactive media, is looking to employ a similar strategy with ANGI Homeservices (ANGI), the company that emerged from the combination of Angie's List and HomeAdvisor.
Check out the latest ANGIearnings call transcript.
Image source: Getty Images.
What is ANGI Homeservices?
Investors may remember Angie's List, the subscription-based home-services review site, which delivered mostly disappointing returns in its six years on the market as the company fell behind competitors like Yelp, HomeAdvisor, and others.
IAC, the HomeAdvisor parent, took advantage of that by acquiring Angie's List in May 2017 for about $500 million and merging it with HomeAdvisor. The newly formed ANGI Homeservices began trading on Oct. 2, 2017.
Since then, the stock is up 38%, and the company has made acquisitions, including Handy and Fixd Repair, which it just announced. It also owns mHelpDesk; HomeStars, the leading online home-services site in Canada; and a number of European brands, including Travaux.com and MyHammer, among others.
The growth path
ANGI Homeservices CEO Brandon Ridenour said the company plans more mergers and acquisitions with the help of IAC, which is very experienced in such deals.
IAC has implemented a similar playbook with Match. And much like Match, ANGI Homeservices is the clear leader in a huge potential market. The company estimates the total addressable market for home services in the U.S. to be $400 billion, and that number is even larger considering ANGI's exposure to the Canadian and European markets. Today, ANGI Homeservices controls less than 10% of that market, and Ridenour considers the company's biggest competitor to be word of mouth, since the majority of homeowners are still most comfortable getting a referral for a plumber or another contractor from a friend or a neighbor.
Despite the highly fragmented and independent nature of the home-services market, the combined company -- led by HomeAdvisor -- has delivered solid growth thus far. ANGI Homeservices revenue jumped 54% last year to $1.13 billion, though that comparison is skewed by the merger; in the fourth quarter, revenue increased 25% to $279 million. The bulk of the company's business is driven by the HomeAdvisor marketplace, which collects revenue from subscriptions from service providers and fees from connecting them with customers.
As an online marketplace, ANGI has several competitive advantages including built-in network effects and switching costs as customers are attracted to the site with the most providers, and providers go to the site with the most customers. The nature of the marketplace also means that profits should ramp up as the company gets bigger and leverages the fixed costs inherent in running the business. For example, sales and marketing expenses, which now take up nearly half of revenue, are likely to plateau at some point as well, which will help widen operating margins.
Ridenour said the company is targeting 20% to 25% revenue growth over the long term, and sees 25% growth next year. Over the long term, the company thinks it can also reach a 30% to 35% adjusted EBITDA margin, compared with 23% last year. Adjusting for acquisition-related costs to take over Angie's List and Handy, the company had operating income of $41.1 million in the fourth quarter and $149.2 million last year.
And ANGI Homeservices should benefit from demographic tailwinds as homeowners are older than the average consumer and are therefore less accustomed to using online tools to do things like finding home contractors. As more millennials and "digital natives" become homeowners, ANGI Homeservices should naturally get a boost.
Ridenour drew a parallel with online dating, which was considered taboo in the early 2000s when it first emerged but is now mainstream. He expects that the sourcing of service providers will become more common as awareness increases and homeowners get used to the idea.
ANGI Homeservices faces challenges, including persuading more homeowners to get comfortable using its services, balancing supply and demand in its local markets, and ensuring a good user experience. But the business has a lot of potential.
For investors, the stock still trades at a high valuation, meaning high expectations are baked in. But if the company executes on its strategy, makes smart acquisitions, and expands in profit margins, the stock could follow a path similar to Match Group.
