Has Angie's List Finally Turned the Corner?
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After a rocky start as a public company, has Angie’s List (NASDAQ: ANGI) finally turned the corner? The company that regularly spends a major portion of revenues on sales and marketing was able to generate strong membership growth by only increasing marketing spend by 10% in Q4. Will the company be able to continue the trend in 2013?
The company helps consumers find local service professionals in more than 550 categories of service, ranging from home improvement to health care. It has more than 1.7M subscribers across the United States that share their consumer experiences and use Angie’s List to gain unlimited access to local ratings and exclusive discounts.
It competes with free review site Yelp (NYSE: YELP) and is a comparative service to TripAdvisor (NASDAQ: TRIP) that provides user submitted reviews for the travel industry. The major difference is that Angie’s List requires membership fees for access to the user reviews, therefore limiting the user base and increasing the quality. The limited user base effectively reduces the potential service provider advertising revenue.
Q4 2012 Highlights
The company reported a surprising profit that easily surpassed the analyst estimates for a 2-cent loss. Revenue of $46M slightly beat forecasts, but the real key to beating estimates was the ability to grow revenue at a substantially higher rate than Marketing.
Below are the highlights for Q4:
- Fourth quarter revenues increased to $46.2 million, up 68% over the prior year quarter
- Fourth quarter service provider revenue increased to $32.5 million, up 83% over the prior year quarter
- Cost per acquisition ("CPA") in the fourth quarter was $39, a decrease of 24% over the prior year period
- Fiscal year 2012 revenues increased to $155.8 million, up 73% compared to fiscal year 2011
- Total paid memberships of 1,787,394 at December 31, 2012, up 66% year-over-year
Q1 2013 Guidance
As important as the strong beat in Q4 is the ability to continue keeping Marketing expense growth down. The company provided the following guidance for Q1:
- Total revenue in the range of $51.0 million to $52.0 million.
- Marketing expense in the range of $19.0 million to $20.0 million.
- Sales expense in the range of $20.0 million to $22.0 million.
While marketing expense will have limited growth over the first quarter of last year, the company still plans to spend at least 75% of revenue on marketing and sales. When including operations, technology, and general administration expenses of nearly $19M if using the Q4 levels, the company has an expense level of roughly $58 to $60M.
Other User Review Stocks
Yelp provides the most comparable company though it focuses as much on restaurants and retail stores as service professionals. The free access does reduce the quality of the reviews, but it also allows the company to have 86M monthly unique visitors or over 50x the user base of Angie’s List. The company actually has a smaller revenue base, but a stock valued higher at $1.35B. The major reason for the higher valuation is the expectations for 2013 earnings for Yelp to approach breakeven.
Conversely, TripAdvisor has already become what these other two review sites want to reach. Due to the quicker adoption of internet advertising for travel, the travel review site has already reached a market cap of over $6B and a revenue base expected soar above $900M in 2013. The company is soundly profitable with earnings exceeding $1.50 this year.
Total Return Chart
Prior to the surge in the stock today, Angie’s List had a negative return since the November 2011 IPO. As the chart below shows, the highly profitable TripAdvisor has easily outperformed the two money losers:
The company has potentially changed the corner with a reduced marketing spend level, but the path to profitability remains a major question. Even these better results still leave the company deep in the red. Questions still remain as to whether the company can generate the membership growth by cutting back on the massive sales and marketing machine needed so far to generate users.
If the company can continue picking up members at a reduced cost, Angie’s List could eventually have a homerun stock. The dream would be for service providers to eventually come to the company for advertising instead of having a massive sales force. For now though, it remains a major question whether users will actually flock to a service to pay for reviews. The advancement of social media could eventually be a major roadblock as users can quickly tap groups of friends for the best plumber instead of a random member on Angie’s List.
Time will tell, but the company still hasn’t figured out how to generate consistent profits to jump into it at these valuations.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of 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!