Please ensure Javascript is enabled for purposes of website accessibility

Angie Has No Bottom

By David Eller – Feb 13, 2014 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Angie's List's business model is under attack from other free services. The strategy to fight back has been to increase marketing spend, a recipe for disaster.

Angie's List (ANGI) announced quarterly results that met the high end of guidance for revenue but indicated a change in the company's spending strategy that jeopardizes the investment thesis. Remember, even a growth story needs profit at some point in the future to justify its valuation. Does a dramatic increase in marketing signify that Angie's prognosis is terminal?

Angie's List revenues of $68.8 million were basically in line with expectations for $68.5 million but higher sales and marketing expenses caused EPS of $0.05 to be dramatically below expectations of $0.13. Sometimes a bad quarter is rescued by better than expected guidance, but expected first quarter revenues of $71.5 million-$72.5 million fell short of the $74.2 million that analysts were expecting. This was a disappointing quarter and may be an indicator of things to come, but you have to offer management kudos for being honest about the outlook. Frankness in dealing with investors, the true owners of the company, is a rare quality among management teams.

The big concern going forward is that the cost to acquire new subscribers is increasing, which jeopardizes the growth strategy and the big profit stream in future years. The company plans to continue to invest in experimental brand development via Search Engine Marketing and specifically guided "marketing spend" to $21.5 million-$22.5 million. This is having the result of forcing sell-side analysts to reduce EBITDA estimates substantially.

Short Hope
The company's leading indicators, which should be driving revenue, were strong this quarter and should be indicating future strength, not weakness:

Ending period members were 2.484 million with a net addition of 105,000 or 4.2%.
Service providers were 46,329 and up 29% year over year.
Service provider contract value was $194 million, up 46% year over year.
Churn of 1.6% was down from 2.3% in September.
Advertising revenue per service provider was $1,119, up $10 from September.

The growth in these metrics may have been below some analyst's expectations, but it indicates hope and hope can be a dangerous thing. Hope spurs a management team to spend more to enter lower-margin markets and embark on increasingly risky projects to keep the dream alive. We all admire people who take risks successfully, but we don't want gamblers to manage our money.

Competition may be destroying Angie's business model
Competition is increasing both at the low end and the high end. Companies like Yelp (YELP 1.40%) have been given a pass on valuation (for now) as they continue to build out geographies and sectors that they focus on. Today people go to Yelp for restaurant reviews but what about plumbers? If you live in Westport CT, and search for plumbers, 143 free business listings come up and Schede Plumbing and Heating (based in a town close by) paid for the top listing. The cost for Yelp to enter this market is negligible and the competitive impact it could have cannot be underestimated since I didn't have to subscribe to get this information. 

Angie has no bottom
Like several other companies we've discussed in reviewing earnings reports, Angie's List doesn't have any profits to speak of so when future growth is discounted, stocks fall back to a multiple of asset values. Technology companies usually stabilize at 2 times cash (e.g. BlackBerry) which would put Angie's List at $1.90 per share. This is not what will happen, this is what could happen if the slowdown in subscriber growth turns out to be long term in nature rather than seasonal and the spending continues.

We want to leave you with a direct quote from the CEO during the Q&A session on the earnings call:

[We] believe we have a pretty good understanding of what the performance issues were in the fourth quarter but its impossible to know, the world is getting more competitive, we know that. And some of those competitors, they are increasing their offering.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Yelp. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Angi Inc. Stock Quote
Angi Inc.
Yelp Stock Quote
$29.62 (1.40%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.