Most people seem to make purchase decisions based on the wisdom, or peer pressure, from family, friends, or acquaintances. While every business has its share of both fans and detractors, the collective opinion of customers is often a fairly accurate depiction of reality. In the internet age of mass communication, product and service reviews are only a mouse click away, for better or worse. The review aggregators are creating treasure troves of information and gaining significant value in the process. So, which companies are the ones to watch?
In FY2012, Angie’s List Inc (NASDAQ:ANGI) posted mixed financial results, with a 73.0% increase in overall revenues compared to the prior year, but another annual operating loss. The company’s sales growth was paced by large gains in its membership base and service provider network, as well as the expansion of its e-commerce unit that offers special deals for highly-rated providers. However, the top-line gains were offset by a steep rise in operating costs, especially in the sales and marketing area, due to a lack of critical mass in most of the company’s new markets.
Looking ahead, management is focused on providing flexibility to its user base by providing a la carte options to its customers, rather than requiring them to subscribe to the entire listing service. In addition, the company is attempting to increase its sales per membership ratio by facilitating transactions through its e-commerce platform. As Angie’s List Inc (NASDAQ:ANGI) gains broad recognition in its new markets, its unit marketing costs should continue to fall, providing an avenue to solid profitability.
Yelp Inc (NYSE:YELP) takes the opposite tack to competitor Angie’s List Inc (NASDAQ:ANGI), by providing free access to its 36 million user reviews of businesses. Instead, the company charges businesses fees for enhanced listing options, as well as deriving revenue from the sale of display and text search advertising. In addition, while Angie’s List Inc (NASDAQ:ANGI) focuses on high cost services, like health care and auto repair, Yelp Inc (NYSE:YELP)’s reviews are more geared toward the leisure market, led by its shopping and restaurant categories.
In FY2012, Yelp Inc (NYSE:YELP) achieved much improved financial results, with a 65.2% increase in revenues compared to the prior year and its first annual operating profit on an adjusted basis. The company benefited from a strong surge in its user-generated reviews and website visits, as well as an expansion of its operations to a total of 44 international markets. On the downside, though, Yelp Inc (NYSE:YELP) has yet to gain meaningful economies of scale from its operations, with the sales and marketing function continuing to consume almost two-thirds of its revenue base.
Looking ahead, Yelp Inc (NYSE:YELP) continues to try to monetize its user base, with deal offers and supplier partnerships, including Orbitz Worldwide Inc. (NYSE:OWW) and OpenTable Inc (NASDAQ:OPEN) in the travel and dining segments, respectively. The company needs to broaden its base of business listings, which only totaled 994,000 out of the roughly 47 million businesses operating in the U.S. as of December 2012. While Yelp Inc (NYSE:YELP) has admirably reached breakeven operating cash flow, it needs to create cost efficiencies if its wants to deliver on investors’ currently lofty expectations.
Once a part of Barry Diller’s InterActiveCorp business empire, Tree.com Inc (NASDAQ:TREE) has been on its own since 2008, providing information, tools, and reviews in the mortgage, insurance, education, and home service areas. Unfortunately, the company’s fortunes have been heavily intertwined with the domestic housing market, which has only reached emerged from its steep decline. Indeed, Tree.com Inc (NASDAQ:TREE)’s operating troubles led to a review of its operations and an eventual exit from the real estate brokerage and mortgage origination segments.
In FY2012, Tree.com reported better financial results, with a 41.8% gain in overall revenues and adjusted operating income that approached the breakeven level. The company’s sales benefited from an improving housing market, as users’ requests for mortgage pricing and information rose at a double-digit rate. However, Tree.com needs to continue developing innovative content, including mobile applications, if it wants to remain a top information destination for customers and reach a sustainable level of profitability.
The service review websites are gaining traction with customers for their ability to separate business winners and losers through unbiased reviews. However, until they show a path to long-term profits, investors would be wise to use their products, but avoid their stocks at current elevated levels.
The article Building Value From Other Peoples’ Advice originally appeared on Fool.com.
Robert Hanley owns shares of Tree.com. The Motley Fool has no position in any of the stocks mentioned. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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