ANGI Homeservices (ANGI) has been mostly a disappointment since the company was created out of the 2017 merger between HomeAdvisor and Angie's List. Today, the stock is limping along following a disappointing second-quarter earnings report, and is trading at a post-merger low.
I recently took the opportunity to scoop up some shares at a discount. Here's why:
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1. A short-term error drove the recent sell-off
ANGI Homeservices plunged following its most recent earnings report. The company missed analyst estimates and was forced to slash its full-year adjusted EBITDA guidance all the way from a range of $280 million to $300 million, to a range of $200 million to $230 million. The reason for the sell-off wasn't a fundamental flaw with the business model, but a fixable issue with its search engine marketing. Specifically, much of its traffic that usually comes from free searches on Alphabet's Google came from paid ads instead, costing the company significantly on the bottom line. Operating income fell by 51% in the quarter and adjusted EBITDA declined 23%.
Management is working to resolve the search engine marketing issues, and they could linger for the next quarter or two. But over the long run, this is just a hiccup on its growth path rather than a long-term concern.
In the second quarter, adjusted revenue increased 20% to $343.9 million, showing the overall business is still growing briskly. Before the second-quarter report, the stock was trading around $13, meaning shares would nearly double from its current level -- around $7 -- if it just recouped its losses since the August report.
2. The total addressable market is huge
ANGI Homeservices is the online leader in a massive market. The highly fragmented domestic home-improvement services market is estimated to be worth $400 billion. Similarly, online on-demand home services are growing particularly fast as more residents look to get needs like housecleaning and home repairs handled through an app or website. According to Technavio, a tech research firm, the global market for online, on-demand home services is expected to grow by a compound annual growth rate of 52% through 2022, adding an incremental $869 billion in revenue.
ANGI itself expects a long-term average annual revenue growth rate of 20% to 25%. The market for home services is highly fragmented and ANGI only has a single-digit share today. But the company should be able to take advantage of a natural tailwind as technology improves and more millennials become homeowners, since they are likely to be natural adopters of online home services from companies like ANGI.
3. The marketplace model is a proven winner
E-commerce has been popular with shoppers, but it hasn't always been easy for businesses. Direct online retail, for example, has proven to be a difficult way to make a profit as retail is already competitive and direct selling involves additional costs like shipping or processing returns.
However, the experience of companies like Amazon, eBay, and even Match Group -- the online dating company that's also majority-owned by IAC (IAC) along with ANGI Homeservices -- has shown that running an online marketplace is perhaps the best way to build an e-commerce business.
ANGI Homeservices derives revenue from both its marketplace and advertising, but the vast majority comes from its marketplace. In the second quarter, 80% of North American revenue come from its marketplace, primarily HomeAdvisor, and revenue from that segment jumped 27%.
Management is primarily concerned with driving revenue growth at this stage in the business' development, with more than half of revenue going to sales and marketing. As its customer base increases over time, however, it should develop an economic moat through network effects and switching costs, allowing it to become more profitable.
4. New acquisitions hold promise
Guided by IAC, the media conglomerate known for its mergers and acquisitions strategy, ANGI Homeservices has made several acquisitions after the merger between Angie's List and HomeAdvisor. The most promising of those appears to be Handy. In fact, IAC CEO Joey Levin even acknowledged that the attention ANGI Homeservices placed on integrating acquisitions like Handy distracted it from more basic issues like the search engine marketing described above.
Nonetheless, Handy and the on-demand services it specializes in hold significant potential for the company. In its most recent shareholder letter, management noted Handy's "growing momentum in pre-priced services," which it has since extended to HomeAdvisor.
Through the on-demand program, the company solves a key customer problem -- unfulfilled requests -- and leverages its own knowledge of the market to come up with the best price, and find service providers for customers. By controlling more of the transaction, the company should be able to add more value and charge higher commissions.
Taking all these drivers into account, investors have a chance to get a high-growth, low-priced stock with a profitable model that is seeing organic growth and leveraging the power of new acquisitions. Given its potential, ANGI looks mispriced. Now looks like a good time to take advantage of the sell-off.
