Angie's List's believers, doomsayers dig in their heels

September 28, 2013

As Angie’s List approaches its second anniversary as a public company, investors remain as split as ever on whether the consumer-review company is wildly overvalued or a revolutionary Internet business still in its infancy.

Witness the company’s trajectory this year. Its shares are up nearly 100 percent, even with a recent swoon. At the same time, it’s one of the most-shorted stocks on NASDAQ.

So-called shorts sell borrowed shares of a company they think is headed for a fall, in a bet they can cover that loan by purchasing shares later at a far-lower price. FactSet Research Systems data show Angie’s List’s short position is 38 percent of its float, the eighth-largest percentage among NASDAQ stocks.

The shorts scoff at the 18-year-old company’s failure to ever turn an annual profit, and question whether it can generate performance that would justify its market value of $1.4 billion.

But just as exuberant are the bulls, who believe Angie’s List’s years of spending massively to secure new subscribers and sign up service providers as advertisers is about to position it for robust long-term profits in a niche it dominates. The believers point out that the costs of renewing subscribers and advertisers plummets after the company absorbs the hefty first-year costs.

“We project that [the company] is reaching an inflection point in its profitability and should achieve positive full year EBITDA in 2014,” RBC Capital Markets said in a new report, referring to earnings before interest, taxes, depreciation and amortization.

No one disputes Angie’s List is growing at a torrid rate. It had total paid memberships at the end of the second quarter of 2.2 million, up 51 percent from a year earlier. Revenue in the first six months of 2013 topped $111 million, up from $61 million. And its loss in the first half of this year shrank to $22 million, compared with $37 million in the first half of 2012.

While those trends are positive, growth rates naturally are slowing as the company increases in size, skeptical analysts note. They say Angie’s List may find it increasingly difficult to grow subscribers and advertising revenue at a clip that will keep investors happy.

“In a nutshell, the company needs to keep a lot of metrics humming within a pretty narrow band to see the profitability ramp that many investors are hoping for,” Deutsche Bank Securities said.

Barrington Research, on the other hand, is zeroing in on the upside, declaring that Angie’s List “is poised for enduring growth and profitability.”

One reason Barrington is bullish is Angie’s List’s paid membership model—a big differentiator from free consumer-review sites like Yelp.

That site boasts far more users than Angie’s List, but it also is vulnerable to bogus reviews from anonymous posters out to either talk up their own business or to diss a competitor’s.

Just days ago, the New York Attorney General’s Office announced a deal with 19 businesses that agreed to stop writing fake reviews on free sites and to pay more than $350,000.

Angie’s List CEO Bill Oesterle said at an investor conference this month that his company experimented with being free in Portland, Ore., years ago but found doing so boosted overhead and diminished the quality of the reviews.

“What we saw is a lot of incremental member sign-up and usage, but we had a lot of incremental fraud,” Oesterle said. In contrast, he said, paid subscribers “are self-identified. … We know who they are. When they give us a report, we are able to verify whether it was accurate or not, whether they manipulated the service.”

When news broke of the New York settlements, it cast a glow over Angie’s List’s alternative approach, pushing its stock up more than 4 percent within hours.

The rally left the shares at around $24. While that’s 15 percent below the stock’s July high, it’s 85 percent above its IPO price.

Analysts acknowledge the valuation quandary. “Given the ongoing losses, the question of how to value [the company] has been a topic of debate,” RBC Capital Markets said.

Meanwhile, Angie’s List continues to broaden its ambitions, rolling out new e-commerce services—such as scheduling appointments and collecting payments. The offerings make it easier for mom-and-pop service providers to do business while also generating new revenue streams for Angie’s List.

“It’s funny. We had the first and last step,” Oesterle said of the company’s historical focus on connecting businesses with customers and facilitating reviews. But now Angie’s List is focused on what happens in between. “And if we can do that, we think the value proposition is tremendous.”•


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