Online Review Sites Shouldn't Ignore the Importance of Synergies
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone loves an underdog story, but the finances are not always encouraging. There are number of small online review sites with upside potential. Regardless, investors should not ignore Google's power and persistence in this online industry.
Angie's List (NASDAQ: ANGI) is like the Rolls Royce of review sites. This company focuses on higher income consumers who are willing to pay for quality reviews. This differentiating factor is a strength of Angie's List because it helps to separate it from free mass market solutions. Even with these positive factors its future is still unclear. Google (NASDAQ: GOOG) is very well financed and can easily use the synergies between its social network, Google Plus, and its search engine to create a massive index of local reviews with substantial traffic. In a sense, Angie's List focus on the higher end of the market is a result of Google forcing Angie's hand as much as it is a proactive marketing strategy.
Angie's List continues to grow and expand their service throughout the U.S. and recently had their first profitable quarter as a public company. The company has $14.9 million in long term debt and $42.7 in cash as of December 2012. With a net loss of $52.9 million in 2012 the firm's cash situation is rather dicey. It is best to hold off investing until its cash flow situation improves. By waiting until Angie's List is more mature it will be easier to determine if and just how profitable is the company's recent growth.
Yelp (NYSE: YELP) offers free reviews and its strategy places them in a similar situation as Google. This strategy is very dangerous for Yelp because Google already has a many users between Gmail, Google Plus, and their search engine. Google.com is free and financed by contextual ads, a very similar strategy to Yelp's. If Google were to be faced by a significant antitrust suit then Yelp's prospects would substantially improve. The U.S. government could force Google to separate their search and content offerings in order to maintain more competition in the market. Such a possibility is more speculation than fact at the current time, and it is best to ignore it when evaluating Yelp.
Yelp does not have any debt, but its income statement is not encouraging. Operating losses are understandable when profitability and growth are down the road, but it is hard to be certain about Yelp's future. The company is growing with a 31% growth in unique visitors from Q4 2011, to Q4 2012. Still, growth is not everything as any investor in Groupon can attest. In 2012 Yelp posted a net loss of $19.1 million and a net operating loss of $10.3 million. Until it is profitable and growth pans out, Yelp is best left to the day traders.
The Online Goliath
Google's strategy of conquering search and then branching out into other segments has worked out very successfully. Their mobile operating system, Android continues to grow along with their traditional online operations. As the world transitions to centralized computing and storage, Google is in a great place to benefit from their wisdom and experience of operating a first rate data center network.
Its search engine receives hundreds of millions of users every month and it is easy for Google to continue expanding their collection of local results. Supporting this operation Google has a mature and profitable business, unlike these small competitors. Its return on investment of 14.4% and profit margin of 21.4% show that Google understands where to profitably invest its resources. With a total debt to equity ratio of 0.08 there is no debt holding Google back and similar competitors like Yelp ought to be worried.
Angie's List's strategy of focusing on the high end of the market looks promising. Right now it is too early to tell just how things will play out, but there may be a David in this story. Google's profitable base in search and successful ventures into the mobile sphere make it a solid investment, regardless of Angie's List's growth.
MrCanadian1 has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!