Though Angie’s List Inc (NASDAQ:ANGI) continues to produce extremely fast revenue growth, the market was disappointed with the forward guidance for Q3. The provider of verified user reviews showed a large increase in operating leverage though the level of losses might continue to scare off investors.
Increasing operating leverage
Angie’s List Inc (NASDAQ:ANGI) reported Q2 2013 numbers that were generally in line with expectations as revenue surged 62%. Operating leverage improved dramatically compared to last year as the company was able to generate over $22 million in higher revenue off marketing spend that was virtually flat. Sure selling expenses surged over 50%, but the total operating expenses were held in check, as the total increase was only $13.5 million compared to the revenue gains.
The company is already proving that the cohorts opened prior to 2008 are producing revenue in excess of the marketing spend. The 10 cohorts that have been around for more than 10 years that naturally include the biggest markets in the US generate revenue of more than 4 times the marketing spend. The interesting study will be the 96 markets opened post 2010 that only average $15,000 in revenues while spending an average of $56,000 on marketing. Will these markets below the 150 largest metro areas provide the size and scale to turn profitable?
Comparing the user base
Yelp won’t report updated user statistics until July 31, but the company had over 100 million monthly unique visitors in March. Conversely, Angie’s List Inc (NASDAQ:ANGI) only has 2.2 million paying subscribers. With a solid base that includes over 100,000 paid households in the cities of Los Angeles, New York City and Washington D.C., it generally lacks the review base in most cities outside the top 10 metro areas.
Though Angie’s List Inc (NASDAQ:ANGI) did get an earlier start, both companies have comparable revenue bases, yet Yelp has a substantially higher market cap. Part of the valuation difference has to due with the vast difference in attracting user reviews. The market clearly prefers the larger user base and geographical expansion of Yelp. Yelp is worth over $2.7 billion while Angie’s sits at only $1.4 billion. The market might also prefer Yelp reporting numbers closer to breakeven in contrast to large losses at Angie’s.
Google threat
According to CNNMoney, the best part of the new Google Maps is the Explore feature that offers a Yelp-like tool. The tool pulls in all the reviews Google Inc (NASDAQ:GOOG) bought from Zagat as well as those from its own user-generated ratings. The main feature allows users to view the best options around that person based on the reviews in specific categories.
The writer claims that going back to Yelp is painful after using Explore. While possible it seems unlikely that the user bases of Angie’s and Yelp would flee those services for yet another service from Google. The richness of reviews would have to improve greatly to make a switch truly occur.
Bottom line
As Yelp soars to new heights, the valuation discrepancy makes Angie’s worth a second look. As a user of reviews, it still seems unlikely that the general public in smaller metro areas will embrace a subscription model. Angie’s might work well in Los Angeles, but a person in a Middle American town would find it easier to pull up Yelp or use the old fashioned method of asking a friend or neighbor for recommendations. With that limiting factor, it remains difficult to get behind Angie’s even with this valuation discrepancy.
The article Angie’s Valuation Discrepancy Still Not Attractive originally appeared on Fool.com and is written by Mark Holder.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Mark 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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