ANGI Homeservices (ANGI) stock was pulling back after its latest earnings report, falling as much as 8% on Thursday. Its results were similar to analyst expectations with revenue rising 12% to $359.3 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 23% to $42 million as the company invested in its fixed-price product. Still, investors may have expected more from the quarter as the stock jumped ahead of the report.
The parent of HomeAdvisor and Angie's List has struggled during the pandemic with revenue growth hovering around 10%, down from its long-term growth target of 20%. Demand on its homeservices marketplace has been strong, but supply hasn't kept up due to pandemic-related challenges related to supply chain and labor, as well as volatility in individual categories. However, during the crisis, ANGI has been making a number of key investments that should pave the way to long-term growth and help the company accelerate that growth once the pandemic ends.
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1. The fixed-price model
ANGI Homeservices' business is connecting homeowners with service providers. Traditionally, it has left it up to the buyer and seller to negotiate pricing. Recently, the company has been building out a fixed-price tool, which accelerated with its 2018 acquisition of Handy. This product lists a set price for jobs, eliminating friction on both sides of the transaction. Customers know up front how much they should expect to spend on a job, while service providers have a job readily booked, eliminating the need to find work themselves, and the hassle of bidding and negotiating on their end.
The fixed-priced business has seen rapid growth since the company began ramping it up two years ago. In 2020 it brought in $162.2 million in revenue, or about 11% of its total. As a percentage of serviced gross merchandise value (GMV) on the platform, fixed-price is a smaller part of the business, but that share will grow as the company adds higher-priced categories and as more customers use the product. In an interview, CEO Brandon Ridenour said he believes half of the revenue will come from fixed-price in 5 to 7 years. If the company can execute on its overall revenue growth target of 20%, that would mean fixed-price sales reaching $1.8 billion by 2026. In majority owner IAC's (IAC) shareholder letter, IAC CEO Joey Levin said that customer frequency doubles when they use the pre-priced product and added, "Our biggest objective in realizing our vision for ANGI is to increase the frequency a homeowner uses our product."
2. A new membership program
ANGI is quietly testing a new pilot membership program, offering customers discounts on pre-priced services with a fee. Ridenour said that once homeowners are offered the membership, the acceptance rate is very high, and the frequency with which they use one of ANGI's services increases by 3.5 times.
The new service does not yet have a name and is still in pilot mode, awaiting a broader rollout and announcement, but it seems likely to be a growth driver for the company and a smart way to leverage its customer reach. The subscription model has been highly successful for businesses like Costco and Amazon Prime, and a subscription could be similarly valuable for ANGI, locking in customers and encouraging them to spend more on the platform, using it for all of their home-improvement needs.
Like the fixed-price model, the membership program gives ANGI another way to increase customer frequency. The company has also invested in its mobile app during the pandemic and driven adoption to the app, noting back in the second quarter that mobile user growth had jumped 85% year over year. Mobile app usage drives customer frequency up 50%.
Finally, the company recently partnered with Affirm to give homeowners a convenient way of getting financing for home improvement work, solving a common problem for homeowners.
ANGI's biggest competition for home services business transactions is word-of-mouth. Initiatives like the ones above allow the company to leverage assets -- like simple pricing, discounts, financing, or a mobile app -- that small businesses can't match on their own. These should all help drive further customer adoption and frequency down the road.
3. Post-pandemic trends
Ridenour characterized the pandemic as a near-term speed bump that's added complexity to the business, but he sees a number of positive factors that will help ANGI's growth after the pandemic. Those include a surge of customer interest and new users, and acceleration in the shift from offline to online demand. "I don't think people go back. I think that's just a shift that's been pulled forward," he said.
Separately, Ridenour noted the broader cultural impact of the pandemic, which has driven people out of cities and into suburban and rural environments where they're more likely to spend money on the kind of services that ANGI provides. Trends like remote work seem unlikely to reverse even after the pandemic ends, as Americans working remotely have gotten a taste of something they like and want to keep. The ANGI CEO also argued that the pandemic has reversed the damage done by the 2008 financial crisis which had scared millennials away from buying homes. "It's reinvigorated America's love of home ownership," Ridenour said.
All three of the above factors are long-term trends that will take time to develop, but they should reassure investors who may be frustrated with the stock, which has been mostly range-bound in recent years even as other e-commerce stocks have taken off.
Management expects to return to 20% growth by the end of the year as recent additions to its sales force start to pay off and the pandemic rolls away. While this growth stock may have slowed down for the moment, there's still a lot of tailwinds working in its favor over the long term. As a unique company in a massive market, ANGI Homeservices still has a lot of potential.
