Angie's List (NASDAQ:ANGI) reported second-quarter earnings on Wednesday, which confirmed one thing: It's not Yelp (NYSE:YELP). Nonetheless, the Angie's List business model of charging a fee for reviews and a service connection has been challenged, much like (NYSE:CRCM), but with the stock losing so much value, is it possible that upside can be found?

The Angie's List problem(s)
Angie's List had lost more than 60% of its valuation in the 12-months prior to its quarterly report, then another 18% on Wednesday afternoon, following its earnings. The reason for Angie's List's downfall is simple: costs continue to rise, it has never been profitable, excessive insider selling, continuous management changes, and most importantly, the ongoing questions regarding the company's business model.

Specifically, with the platform being a place where users find service providers, and pay a fee to use the platform, how reliable can that platform be when service providers or businesses are also paying for an enhanced listing? After all, Angie's List has to give its paying businesses something for that fee, and that something has widely been considered more favorable reviews.

The unfavorable comparisons to Yelp
The second quarter saw more of the same. The company's revenue grew 33% to $78.9 million, but its net loss of $18.4 million served as a big disappointment, especially as its price to acquire members increased to $90, and marketing expenses of $35.9 million also soared.

Large operating losses are nothing uncommon among web-based companies. However, given the strong fundamental performance of peer Yelp, Angie's List investors are rightfully worried that the company is losing whatever momentum it had left. Specifically, Yelp's quarterly revenue is very similar to Angie's List, but its growth of 65% is anything but comparable.

Furthermore, cumulative review growth of 46% is also bullish for Yelp, as are increased monetization tools. Yelp has excelled in the review business, mainly because it is free for both consumers and businesses (the company generates revenue through advertising). Also, unlike Angie's List, Yelp has a growing presence in international markets, where traffic grew more than 90% during the company's last quarter.

With Yelp and Angie's List trading at 19 and 2 times sales, respectively, it's clear which business model attracts the most investor faith. Yelp currently has a 1% market share of mobile advertising, but eMarketer estimates that share of the fast-growing segment will increase 60% by the end of next year. Meanwhile, some investors question whether Angie's List will have enough cash, or company value, to maintain its expensive operation.

Is there any value in the Angie's List model?
While Angie's List clearly has problems, it's still expected to grow at a double-digit rate this year, and at two times sales, investors have to start wondering if there is investment value? Perhaps, but the problem is that Angie's List competes directly against Yelp and other review sites, but with no real primary focus.

Instead, for investors who are willing to take a chance on the Angie's List business mode, is also a relatively cheap stock, trading at just 3.7 times sales. Also, it has a direct focus on care-giving: The company provides a platform for consumers seeking caregivers, whether it be a nanny, for elderly, pet watchers, etc. Thus, caregivers are willing to pay monthly for the possibility of finding a job, and users will also pay a monthly fee to find a qualified caregiver with reviews.

When focusing on one specific market, the Angie's List model seems to work, which is why total members grew 44% during's last quarter to 10.7 million, almost split equally by caregivers and care-seekers. In other words, quality over quantity has proven to be effective thus far.

Foolish thoughts
Given the competition that Angie's List faces against larger free review sites, investors are wise to worry that users won't continue to pay for a fee service. However, Yelp, at nearly 20 times sales, is not cheap, and while is unlikely to become a multi-billion dollar business, it could still generate long-term returns with sustainable growth for many years to come.


Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Yelp. Try any of our Foolish newsletter services free for 30 days. 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.