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.

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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