Even seasoned investors scratch their heads over Angie’s List.
The Indianapolis company that gets consumers to review service providers, such as plumbers and electricians, then charges for access to the reviews—hasn’t made a profit since it was founded nearly 17 years ago.
Yet it managed to net $72 million in an initial public stock offering last November. And even during a lousy market, its stock price still trades about $1 above its IPO price.
That’s in spite of the company’s losing $49 million last year on revenue of $90 million.
But what would appear to be another example of an overvalued and speculative tech stock is, according to several analysts, on track to become profitable in 2014.
Losses—including $13.5 million in the first quarter—are largely the result of a nationwide advertising blitz to finish building out a footprint that now totals 186 markets.
It spent $56 million in marketing last year and $18 million in the first three months of this year, much of it on television commercials.
Co-founder Angie Hicks is now almost as omnipresent on television as Flo, the peppy Progressive insurance cashier.
“If [Angie’s List] cut marketing, they could be profitable very quickly,” said Shawn Milne, an analyst at Janney Montgomery Scott, in San Francisco. “That’s not the strategy at this point.”
The strategy, quarterbacked by CEO and co-founder Bill Oesterle, isn’t readily apparent to casual observers, many of whom can’t get beyond perpetual losses that date back to the first term of the Clinton administration.
With an MBA from Harvard University, Oesterle is fond of excruciating dissections of how Angie’s is faring in its 186 markets, which are organized according to how long the company has operated there. He slices and dices the markets with the enthusiasm of Ron Popeil demonstrating the Ronco Veg-O-Matic.
“If you don’t have the information to understand the model, it looks really bad,” Oesterle told IBJ. “Negative net income for 16 years.”
Membership numbers are king
While Oesterle’s analytics are dizzying, the success of the model relies on one thing: attaining a critical mass of paid members.
Members pay as little as $17 a year for membership in a younger market, such as Terre Haute, or $29 in an older market like New York City. In Indianapolis, one of Angie’s List’s oldest markets, members pay $62.40 a year.
Bringing a market to maturity is where the money’s at, and the life cycle goes something like this:
As the company spends big to flood a market with advertising, it gains more members. Those members write more reviews, which increases the perceived value of Angie’s List’s service and attracts additional members.
The increased market penetration and name recognition attracts more service providers to advertise (usually in the form of coupons and other special offers to members). With a larger pool of members, the company can justify charging higher ad rates to those service providers.
Angie’s List can also justify raising membership fees over time as the volume of reviews grows more substantial. Renewal rates tend to rise, and thus the cost per member acquisition tends to fall.
“The key metric to judge the health and overall pace of [Angie’s] business is membership growth,” RBC Capital Markets’ analyst Ross Sandler said in a report.
Memberships in the first quarter, year-over-year, zoomed 81 percent, to 1.22 million.
Sandler’s not projecting a profit until 2014, given that Angie’s is in “marketing land-grab mode.”
But investment firm Janney said Angie’s market rollout in the United States, now approaching 200 metro areas, “is largely complete.” And although Angie’s markets are in various states of maturity, collectively they are approaching the critical mass needed to earn a profit.
Most of the markets—103 of them—date to 2008-2010 (“adolescent,” in Oesterle’s parlance).
Only 45 are deemed as mature or oldest, while the other 38 were entered post-2010. With the U.S. market footprint now largely staked out, Oesterle wants to sink deeper roots in each one.
One reason is that Angie’s doesn’t possess a proprietary technology, per se. So it’s in a hurry to conquer the country while it can, before competitors get a foothold.
Also, the more penetrated the market, the more profitable it tends to be.
Markets established post-2010 generate meager average annual revenue of $5,871, while the oldest markets bring an average $3.62 million in annual revenue.
In the aggregate, the numbers for Angie’s List are looking better.
Ad dollars from service providers are becoming a bigger part of the company’s revenue, zooming to 68 percent in the first quarter from 60 percent in the quarter a year earlier.
Janney’s Milne estimates that service-provider revenue will grow 74 percent this year, to $94.5 million. Next year, the estimate is a 51-percent increase, to $143 million.
By 2014, revenue from service providers will have risen to about 75 percent of the total, versus 62 percent last year, according to investment banking firm Stifel Nicolaus.
“We believe service-provider revenue is the ‘secret sauce’ that is scaling sharply as the network grows,” Milne said in a report issued earlier this year.
Membership fees make up most of the rest.
Another positive metric cited by Angie’s is the falling cost of acquiring new members. The average cost across all markets was $76 per person in the first quarter, down from $87 in the year-earlier period.
“Right now, our acquisition costs are declining, our renewal rates are increasing, and our revenue per household is increasing,” Oesterle said this month in a presentation to Bank of America Merrill Lynch.
Also, marketing expense as a percentage of revenue declines as markets mature.
In 2011, Angie’s spent about 62 percent of revenue on marketing, according to Stifel Nicolaus. By 2014, the percentage will have plunged to around 33 percent.
In Angie’s 10 oldest markets—which include Indianapolis, Chicago and Columbus, Ohio—marketing represents 27 percent of revenue.
“Increased penetration in a given market drives overall market revenue and profitability,” Milne said.
Meanwhile, some analysts are also salivating over Angie’s potential in e-commerce sales, a more recent offering in some markets.
In Denver, for example, Angie’s is testing an offering in which members can buy directly from a service provider by clicking on a “buy it now’’ button. Recently, the company added a Palo Alto, Calif.-based engineering team to develop additional e-commerce tools.
In the first quarter, Angie’s List generated $3.8 million in such revenue, with its take averaging 24 percent of each transaction.
Oesterle noted that Angie’s historically has taken members right up to the point of a transaction with a service provider, then stepped aside. He estimates that Angie’s List has potentially been a driver in $10 billion of transactions over the years, and that capturing some of that through e-commerce options could be lucrative.
“I’m sure 16 years ago, they had no idea they were going to be an Internet-based company. They have morphed over time,” observes George Farra, a principal of Woodley Farra Manion Portfolio Management.
Of course, Angie’s doesn’t operate in a market vacuum anymore.
Also seeking to tap a chunk of the $400 billion from the local services economy are competitors such as Yelp! and Groupon, both of which have also gone public, and ServiceMagic.
Eight-year-old Yelp!, like Angie’s List, aims to help match consumers and businesses, and much of its income comes from ad revenue as well.
Groupon has a narrower focus, at least for now, and offers daily deals on restaurants and entertainment venues.
ServiceMagic offers a screened and approved list of local service providers. Unlike Angie’s, however, it does not charge a membership fee to consumers.
ServiceMagic, based in Golden, Colo., is clearly on Angie’s radar. Earlier this month, Angie’s List filed a federal lawsuit against the company, alleging it was misusing Angie’s trademark to intercept people conducting Google searches for Angie’s List.
ServiceMagic also bought a sponsored link on the upper portion of the Google results page titled: “Why Pay for Her List? Our Service is Free.”
“Competition for the local merchants’ advertising dollars is growing. We believe well-funded companies such as Google, Groupon, Yahoo … are competing for many of the same dollars Angie’s List is pursuing,” Michael Graham, an analyst at Canaccord Genuity, said in a report last April.
Although Angie’s has a unique business model, “there is a risk that competitors could start offering similar services or consumers and service providers could be persuaded to use alternative platforms.”
Analysts also said there’s no guarantee Angie’s will see the same level of growth in new markets that it has in older ones.•