Angie's List (Nasdaq:ANGI) helps facilitate the linking up of customers and businesses in local communities. It has a solid reputation for attracting the attention of dependable businesses that are likely to charge a fair price for their services and complete the work on time. The business has been around since 1995, but has grown rapidly during the past few years. Just last week, it issued shares to the public. Unfortunately, the valuation looks out of whack with what the business is currently delivering in terms of profits, or profit potential.
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Angie's sells a membership that allows customers access to its database of local service professionals. For this fee, Angie's researches more than 550 service categories and grades each provider. Categories include carpet cleaning, dentists, automotive detailing, plumbing and just about any service a consumer could ever need. It describes its service as an "ask-your-neighbor" approach that also allows for feedback from actual customers, and serves as a primary means to weed out reliable service providers from the rotten ones. Service providers with high marks from customers are allowed to pay for advertising through Angie's List.
Angie's listed more than a million paying members in its initial public offering (IPO) prospectus and paying members in more than 175 markets in the United States. Over the past three years, its membership growth has been rapid at 47.5% annually. This boiled down to membership revenue of $33 million in 2011, up from less than $11 million back in 2007. For related reading, see Investing In IPO ETFs.
Unfortunately, this rapid sales growth has so far failed to result in any profitability. In fact, over the past three years losses have only grown as Angie's has spent increasing amounts to sell and market its own services. Last year it lost more than $49 million, or $1.60 per diluted share.
The Bottom Line
Based off a current market capitalization of around $1 billion, Angie's List currently sports a lofty price to sales multiple above 11. In the current IPO craze that has seen online firms ranging from music player Pandora Media (NYSE:P), restaurant and bar reviewer Yelp (NYSE:YELP), deal-of-the-day purveyor Groupon (Nasdaq:GRPN) and new media marketer ExactTarget (NYSE:ET), Angie's List has been around since 1995. This qualifies it as a seasoned firm compared to the above and other younger players.
Its business model appears to be sound and unique, with Yelp a reviewer but focused on eateries and anonymous feedback. There are major drawbacks though, such as the lack of profitability, free cash flow production and an uncertainty of whether "investment in member acquisitions" has resulted in sales levels that are unsustainable, or simply uneconomical because Angie's has had to spend too heavily to drive sales. Until more tangible signs of earnings and returns on investor capital start to show through investors might be better off on the sidelines. For additional reading, check out 5 Must-Have Metrics For Value Investors.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.