Providing Consumer Reviews - A Viable Business Model?

Gail is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In addition to being an investor, I’m a business owner and my lives are constantly overlapping.  When we were recently contacted by Angie’s List (NASDAQ: ANGI) to renew our advertising contract for another year, I was pretty surprised.  Our Account Manager sent us an email requesting a 71% increase in our advertising rate to stay at the same level as 2012 and a 27% increase in price if we decrease our ad size by a third.  This is on top of the 160% increase we agreed to for 2012.  With those kinds of revenue hikes, I thought that Angie’s List must be an amazing investment.  Please follow along with me as I look into the news and financial results of Angie’s List.  For comparisons sake, I’ll also look at Yelp (NYSE: YELP) and TripAdvisor (NASDAQ: TRIP).

My Process:

When I look at a new company, the first thing I do is enter its earnings results into a spreadsheet template that’s I’ve created.  Once I enter the numbers, Excel performs its magic and spits out all of the ratios and growth rates I’ll need.  The primary company I’m looking at gets a thorough going over with revenues and expenses broken down by segments.  I look at the comparison companies at a much higher level.

What I Found:

Angie’s business model is to provide reputable service providers to its members and to provide high quality customers to its advertisers.  Its revenue comes from two sources.  The company currently receives about 32% of its income from member fees and about 68% from advertisers. 

This ratio between revenue streams is interesting to study: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Last 4 Qtrs</p> </td> <td> <p>YE 12/2011</p> </td> <td> <p>YE 12/2010</p> </td> <td> <p>YE 12/2009</p> </td> <td> <p>YE 12/2008</p> </td> </tr> <tr> <td> <p>Membership</p> </td> <td> <p>31.9%</p> </td> <td> <p>37.6%</p> </td> <td> <p>42.6%</p> </td> <td> <p>44.8%</p> </td> <td> <p>47.1%</p> </td> </tr> <tr> <td> <p>Svc Providers</p> </td> <td> <p>68.1%</p> </td> <td> <p>62.4%</p> </td> <td> <p>57.4%</p> </td> <td> <p>55.2%</p> </td> <td> <p>52.9%</p> </td> </tr> </tbody> </table>

Over the years, the percentage of revenue from members has been decreasing.  And, while the actual revenue from memberships has been increasing, it is increasing at a slower rate.  Membership increased 34.5% YOY from 2010 to 2011 but only 29.4% when comparing the most recent four quarters to FY2011 results.  (As a comparison, the rate of revenue change from service providers for the same time period is relatively flat.) As a business owner, I wonder if Angie’s will be able to reverse that trend.  Advertising as a Service Provider in an organization like Angie’s List only makes sense so long as membership continues to grow at an increased rate.  If the rate of member growth slows, advertising is much less attractive.

Other items of note from Angie’s Balance Sheet include Retained Earnings continuing to decline, and, despite an influx of cash in 2011, a Quick Ratio of only 0.8.

In addition, the number of days that it takes Angie’s to collect its receivables and to pay its bills are both increasing dramatically.  In 2010, it took Angie’s about a month to collect on receivables.  That has changed to more than two months as reported for the quarter ended September 2012.  Similarly, in 2010, it took Angie’s about five months to pay for AP, but almost 8 months as reported in the MRQ.  While I know from my previous look at inventory turnover that these ratios can’t be used to predict stock price, they are alarming indicators nonetheless. 

Taking a look at Yelp and TripAdvisor provides additional context.  TripAdvisor is a viable and profitable company with a positive P/E and healthy profit margins.  Yelp went public in March of this year with an offering price of $15.  And, while Yelp is still in its infancy, its profit margins are much more impressive than Angie’s List.   For comparison, take a look at the gross and profit margins for the three firms as well as their current and projected stock prices:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>ANGI - 9/2012</p> </td> <td> <p>ANGI -  9/2011</p> </td> <td> <p>YELP - 9/2012</p> </td> <td> <p>YELP - 9/2011</p> </td> <td> <p>TRIP - 9/2012</p> </td> <td> <p>TRIP - 9/2011</p> </td> </tr> <tr> <td> <p>Gross Margin</p> </td> <td> <p>71.3%</p> </td> <td> <p>71%</p> </td> <td> <p>93.1%</p> </td> <td> <p>93.1%</p> </td> <td> <p>98.6%</p> </td> <td> <p>98.2%</p> </td> </tr> <tr> <td> <p>Profit Margin</p> </td> <td> <p>-42.9%</p> </td> <td> <p>-61.8%</p> </td> <td> <p>-5.4%</p> </td> <td> <p>-15.2%</p> </td> <td> <p>43.4%</p> </td> <td> <p>52.8%</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p>--------</p> </td> <td> <p>--------</p> </td> <td> <p>--------</p> </td> <td> <p>--------</p> </td> <td> <p>--------</p> </td> <td> <p>--------</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p>ANGI - Current</p> </td> <td> <p>ANGI - 1 year Target</p> </td> <td> <p>YELP - Current</p> </td> <td> <p>YELP - 1 year Target</p> </td> <td> <p>TRIP - Current</p> </td> <td> <p>TRIP - 1 Year Target</p> </td> </tr> <tr> <td> <p>Stock Price</p> </td> <td> <p>$10.70</p> </td> <td> <p>$15.13</p> </td> <td> <p>$19.46</p> </td> <td> <p>$26.06</p> </td> <td> <p>$41.67</p> </td> <td> <p>$41.31</p> </td> </tr> </tbody> </table>


ANGI: Angie’s List continues to grow its revenue base and decrease its expenses.  These are good things.  Though I am thinking twice about renewing my advertising contract with the company, I believe that the stock will provide good results in the short term.  When analysts start predicting positive earnings, it will be time to jump in with a larger portion of your portfolio. 

YELP: I’m a cautious investor, and while Wall Street is predicting significant gains in stock price for Yelp over the next year, there is not enough history for me to feel comfortable making a recommendation.

TRIP: Based on my research into these three companies, I would recommend a long term investment in TripAdvisor.  This appears to be a solid firm.  In addition, Deutche Bank last week upgraded their recommendation to Buy with a one year price target of $50.

GailPEddy has no positions in the stocks mentioned above. The Motley Fool owns shares of TripAdvisor. Motley Fool newsletter services recommend TripAdvisor. 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!

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