Competition Looms Over Business Model

September 05, 2013, 10:00 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Shares of Angie's List Inc (NASDAQ:ANGI) tumbled as much as 16% after reporting disappointing second quarter earnings in July. The company posted a loss of 25 cents per share, which was an improvement from last year’s 41 cent per share loss. The stock is up 117% over the last year, but has now fallen over 25% since July 1. So, is the recent pullback a buying opportunity, or the start of a downtrend in the stock?

Angie’s List spends about 80% of its revenue on sales and marketing, and charges for its services, while competing against Yelp Inc (NYSE:YELP) and Home Advisor part of IAC/InterActiveCorp (NASDAQ:IACI) who offer similar services for free.  Angie’s list has a much lower subscriber growth rate and less unique visitors, being a paid service.  To give you an idea, Angie’s list has just recently reach 2 million subscribers after 18 years of doing business. Yelp added almost 3.5 million reviews last quarter alone. Of course, Yelp offers a much broader range reviews, and not just services. Yelp averages 108 million unique visitors each month, and about 32% of those are from mobile. Yelp’s CEO said during the Q2 conference call, that a study by Nielsen found that when consumers find a local business on Yelp, 89% make a purchase within a week. Angie’s List will need to find new ways to compete with impressive numbers like that from competitors.  ANGI recently broke below support based on the report offered by Stock Traders Daily, which has now converted to resistance, and the stock is currently sitting below converted resistance accordingly.

Angie’s List acquired start-up SmartHabitat for $2.65 million, in an effort to transform local service and improve user experience. The company said it plans to build a new platform that will include web, mobile and call centers. The new tools and interactive content will allow the company to provide a more customize experience for members, tailored to their specific interests. Angie’s List is betting that the consumer will chose premium features and reviews for a cost, over a higher volume of reviews for free. The company is not profitable and carries about $14 million in debt, so it can’t afford a misstep.

Angie’s List has been able to increase the subscriber count by decreasing membership fees in the past, but the company also raised service provider’s participation fees at the same time. Over the past 3 years, quarterly revenue per subscriber decreased 34%, while revenue per service provider rose 64%.  Service companies might consider paying for ads on Yelp or Google if fees aren’t reasonable.

Angie’s List will have to find innovative ways to compete with free services like Yelp and Home Advisor if the company operates with an older business model, and if it struggles to find new ways to add subscribers and revenue there will be pressure to reduce prices to consumers. The stock is still up over 75% year to date, but since making all-time highs in early July the stock has fallen sharply. According to the real time report offered by Stock Traders Daily, long-term support has just broken lower, which raised sell/short signals. As long as the stock remains below long-term support (now converted resistance), we expect shares to trade lower.

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