Angie’s List – Pump and Dump Probability Rises

Do you use Angie’s List? Do you know anyone who has? I certainly do not. When an internal stock pitch competition called for a short pitch on a technology stock and I stumbled across ANGI, I knew I had something.

Recently, I wrote a post about Angie’s List (NASDAQ:ANGI) promising to dig more. Well I dug, and this company is far worse than I suspected.

Some serious questions are starting to pop up around Bill Oesterle. Google was not kind. Probably the most damning allegations stem from his purchase of $2M worth of property with another Angie’s List board member. Who did they lease the property to? Angie’s List, for over $6M. One wonders where the additional $4M dollars went, since Glassdoor.com reviews complain about the poor quality of the buildings in which employees work. Most of the positive reviews on Glassdoor are by the commissions-based sales force which emphasize that you can make a lot of money at ANGI. It is nice to know the sales force is being well-taken care of by a company which has never turned a profit in 18 years.

Additional shady details on the building deal can be found here. Now there could be perfectly legitimate reasons to do this sort of thing, but combined with the massive insider stock selling, we should be very skeptical. ANGI has also been rated as having aggressive accounting practices by GMI. Specifically, prepaid expenses got ticked as dangerously large, this would increase Operating Cash Flows, which management has been emphasizing as the best performance metric by which to gauge the company.

Additionally, despite having a much smaller user base, ANGI actually has more negative reviews than all of Yelp. Reviews of Angie’s List, written by both service providers and members, can be found here, here, here, here, and here.

The CFO and CTO have both been changed out this year. I’m not sure how much more I really need to dig into this. All the factors we’ve mentioned in our first post and this one, by themselves would be concerns. Combined, these are klaxons blaring “Abandon Ship”.

Consensus estimates paint a rosy picture. I will not. I finally had some time this weekend to work out a DCF. The primary assumptions are listed below:

  1. ANGI stays in business and is able to pay off coming loans in the next two years
  2. Membership revenues decline and ANGI focuses on service provider (contractor) revenues
  3. Margins remain at their historically awful levels, improving only slightly
  4. Revenue growth continues to be high

Bear and Bull Cases

Base Case

Being a little generous on the WACC (10% and Terminal Rates)
Being a little generous on the WACC (10% and Terminal Rates)

DCF Results Fair Value

It is possible that Yelp or another firm could purchase ANGI, but I have to wonder why. Management has been trying to sell the company for years, and has not been able to find a willing buyer. The firm is neither large nor profitable, so the competitive threat is minimal to a firm like Yelp or Ebay. To be safe, I would estimate ANGI is worth $5-6 as a takeover target.

The more I dig the more disgusted I have become with the practices behind this business. Good products sell themselves. Yelp does not need a call center, staffed with hundreds of sales specialists to obtain site visits. The reality is that management could pull a lot of levers to keep the company going for at least another year. I really feel bad for the shareholders who have invested in this firm. This story will probably not end well for them.

More links are listed below:

http://www.forbes.com/sites/greatspeculations/2013/09/10/aint-it-time-to-say-goodbye-to-angies-list/

http://www.investopedia.com/stock-analysis/100713/why-angies-list-doesnt-rate-well-shareholders-angi-hd-iaci-goog-yelp.aspx

http://seekingalpha.com/article/1776412-angies-list-worth-9-based-on-expected-lifetime-member-value-in-2015

Again I would like to thank my fellow student for conducting much of the research, especially the per-member analysis. He can be reached on Twitter as @adammcash

I intend to short the stock until December, in case a major institution decides to cut losses. This is my first short, and I do not want to be greedy. I have already made ~17% since initiating a position in late October.

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Angie’s List – Say Goodbye to 90s Internet (NASDAQ:ANGI)

Angie

I need to thank my fellow b-school student for doing a LOT of the digging which went into this:https://twitter.com/adammcash

I have never shorted a stock before. Even when I have had a compelling case, timing has been a huge problem for me. I am now shorting Angie’s List. I feel so confident in an impending collapse at this point that I have put a small portion of my portfolio into the short.

For those of you who have not seen the terrible commercials, Angie’s List is a premium-membership review site.

NASDAQ:ANGI targets households worth $100,000 or more and provides premium services. The company plan is to grow memberships as big and fast as possible, and sell advertising to service providers. Angie’s is attempting to develop a Facebook-like ecosystem. Angie’s List promises its members better quality reviews of local contractors. Angie’s then turns around and promises its contractors/service providers access to higher net-worth customers. Angie’s also offers search ranking boosts and other positioning perks to its contractors as well for a fee. Membership fees cover SG&A while advertising is supposed to benefit profits.

Anyone under 30 can see that the business model is flawed. You can’t claim to offer unbiased reviews of contractors to members, charge them money, and then turn around and promise those same contractors better search placement and reviews, also for money. It’s one or the other. Competitors recognize this, and there are many.

Competitor Logos

There have been rumblings out of management that they might tweak the model. Doing so at this point would put a significant drain on their cash reserves, and, as you will see, those reserves are already extremely weak.

Angie’s List 2013
Market Cap $784,000,000
Total Assets $109,735,000
Total Liabilities $132,766,000  < Yikes!
Total Members 2,378,867
Average member value $280
Total Shares 58,420,000

Negative book value is never a good sign. For a tech company we might shrug it off and say, “well maybe it will grow”. So let’s look at the growth.

Service Provider Revenue 69% (increasing)
Membership Revenue 31% (decreasing)
New Members Added y/y 933,556 (flattening trend)
Average Lifetime Membership 4.5 years (decreasing)
Avg Yearly Membership Fee $30 (decreasing)
Avg Yearly Service Revenue/user $40 (decreasing)
Avg Cost of Acquisition $80 (steady)
Avg Maintenance Cost/user $55 (steady)

Average costs need to decline in order for the business model to succeed. Membership growth is slower than anticipated. Membership fees have been slashed as of October 2nd. Angie’s List is alienating it’s customer base, experiencing membership churn of 5-7% per quarter. There are only so many +$100,000 households out there. As the company grows advertising, the ads get less targeted and less valuable.

Adam crunched some NPV membership numbers for Angie’s List:

Membership Lifetime
5 yrs 4 yrs 3 yrs 2 yrs
Membership Fee $40 $67.91 $49.83 $28.13 $2.08
$30 $38.00 $23.94 $7.06 ($13.19)
$20 $8.10 ($1.95) ($14.00) ($28.47)
$10 ($21.81) ($27.84) ($35.07) ($43.75)
Current Value  
Value per User $5.00 – $6.00
Market Cap $784,000,000
Share Price $13.32

Adam assumed an advertisement revenue per member of $50 and a 20% discount rate. Those are heady numbers for a company which may abruptly change its model to something more like Yelp! What happens to all the members who paid for a 5-year membership if Angie’s List were to change to a free member model? One giant refund.

I estimate it to be around $40M, which would represent all of the cash that Angie’s List has on hand! $42M!

Well OK what about a loan? That gets pretty dicey for a company such as Angie’s List which has negative book value already (more liabilities than assets).

Management is in dire straits and they know it, but really they’ve known it all along. Having cashed out over 10M shares (20% of the shares outstanding), and made no substantial purchases since the IPO in 2011, they must clearly understand that they are riding a sinking ship. There has not even been any rhyme or reason to insider stock sales, which would probably help them claim innocence during the inevitable lawsuits and bankruptcy proceedings to come.

I conducted a regression analysis, to try to determine whether management was timing sales, or simply dumping as many shares as possible every month. It is rare for management to sell so much stock periodically, when ANGI is not making a single dime of profit. How many start-up entrepreneurs cash out of their firm when it is not making money??

No Pattern to Insider Sales

R2 No Pattern

Note the incredibly low R-Square. These guys aren’t cashing out at a certain price point, or attempting to sell at some internal price goal. They just want out. The CEO has already sold over $16M since the IPO. An astounding total of $133M (1/7th of the float) has been sold by insiders since the IPO! What does that say about management’s honest outlook?

Management has two options:

1. Rework the business model, take a massive hit to current assets, hopefully get more loans from the underwriting banks, and continue to fight for revenues in a crowded space against established competitors. Meanwhile, app-based competitors run the risk of outflanking Web 2.0 models entirely.

2. Sell the business.

Option 2 is really the only viable option, and the company has been for sale for years now. Bankruptcy looms within 2-3 years max. I put it at 1-2 years personally. I don’t think the banks are going to be willing to throw much more sunk cost in. The only banks recommending the stock as a buy are the ones still holding the paper, in loans,bonds, and equity. More numbers to come as I dig deeper at one of the worst public companies I have seen.

On a good day, if the wind is right, this stock is only worth $9-10 dollars as a buyout candidate. In reality, this company is worth maybe $3-5. I intend to short until it hits $10/share.

Salute Your Shorts – NASDAQ:SWKS

Skyworks Logo

Recent Price: $25.93
Target Price: $31.57
Potential Gain: 22%
Market Cap: $4.48B
CEO: David Aldrich (2001-Present)

Skyworks Solutions (NASDAQ:SWKS) is a differentiated, low-cost provider of analog radio-frequency semiconductors. The company sells its products primarily through a direct sales force, as well as through independent manufacturers’ representatives and distribution partners. SWKS manufactures 80% of its wafers and does 90% of its assembly and testing in-house.

Products include amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, phase locked loops/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, and technical ceramics. The company also offers MIS silicon chip capacitors and transceivers.

Internet-of-Things-1

The global population is still under-connected. Traffic from wireless and mobile devices will exceed traffic from wired devices by 2017. SWKS is uniquely positioned to capitalize on this trend. Product segmentation has moved from an 80/20 to a 60/40 mix of mobile / non-mobile revenues. Management sees a 50/50 mix in the near term. This runs contrary to the theme of many semiconductor producers, who, if anything, have become more closely tied to the big handset manufacturers.

Product Potential

Customers include Cisco, Boston Scientific, GE, Harman, Lenovo, Foxconn, ZTE, Samsung, Google, and Huawei.

SWKS has products which address the mobile-to-mobile, medical, automotive, networking, SmartEnergy, Infrastructure, and mobile devices.

The company also owns a portfolio of approximately 1,000 patents.

Expanding FootprintIf you own an Iphone 4 or 5, or a Samsung Galaxy, you have already bought this company’s products.

Key restrictions in the mobile space revolve around two things:

  1. Power – That little device in your pocket has to be able to reach a cell tower 10-30 miles away. SWKS started out in power amplifiers, and that skill-set has a very direct technical relation to number 2.
  2. Spectrum – Different providers use different radio-wave frequency ranges.  Furthermore, different countries regulate their RF spaces as well. More information can be found here: http://en.wikipedia.org/wiki/Frequency_allocation . Transmitting on a specific frequency requires minute changes in power amplification.

What about the competition?

Comps

It is worth noting that Skyworks has lower employee turnover than the industry average. Glassdoor.com ratings by employees are also very positive. In the tech industry, your most important assets are people. These trends bode well for Skyworks, and are reflected by revenue/employee.

Gross Margin Comparison

SWKS has expanded its gross margin at a time when the semiconductor industry, and the company’s main competition, experienced a downturn. Management has been guiding margins up!

The secret sauce here is the manufacturing process and the deep relationships with clients. Skyworks is rolling out products which are manufactured as one total package. This reduces manufacturing costs, and limits opportunities for OEMs to plug and play with competitors. In addition, they have been able to consistently improve chips per wafer.

The semiconductor industry is notoriously cyclical. SWKS manages these risks with a hybrid model. They manufacture in-house in segments where they feel they have a competitive advantage, and partner up with others when they do not. Vertical market discipline is something management talks about quite a bit in their earnings calls.

Shorts

We should all be thanking the shorts for keeping a lid on the stock. Having painted Skyworks with a broad, industry-wide brush, they have realized their mistake and are now hitting the eject button. Current short interest is around 3%.

DCF Assumptions

I settled on a WACC of 12%, based upon comparisons to competitors, and to company information on cost-of-capital available on the website. No debt certainly made the calculations easier.

WACC and Terminal

The bear case assumes a more tepid sales growth rate than average Wall Street estimates.

The base case is pretty much in line with Wall Street estimates.

The bull case assumes management can grow margins to 30%, which is their stated goal, as well as strong revenue growth as the internet of things picks up speed.

Platform Agnostic – Samsung, Apple, HTC who cares? Any way you slice it Skyworks wins and is pushing out into growing wireless device markets

Tax Advantaged Dividends (Buybacks) – $250M share buybacks announced recently, represents about 5.6% of the common stock

China – movement from 2G to 3G networks is still ongoing. 3G is only ~30% of market in China

Internet of Things – Growing demand for wireless devices of all flavors (NEST home devices, keyless FOB, GPS guidance, UAVs, etc)

Mr. Market is forecasting the typical semiconductor woes on a superior management team, with a superior business model, yielding ROIC well above the cost of capital (5-10% above cost FY10-FY13)

I have put 2% of my portfolio into this company, and may buy more as opportunities present themselves.