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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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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