Yelp Inc (YELP), Groupon Inc (GRPN): The Problem With Troubled Internet Companies

Angie’s got some problems

Finding reliable local professionals like plumbers and electricians can be challenging, and Angie’s List Inc (NASDAQ:ANGI) aims to make it easier. The company operates a platform where members can find and hire local professionals which have been determined to be reliable. This removes much of the uncertainty surrounding this type of hiring.

Angie’s List Inc (NASDAQ:ANGI) is losing money at such a rate that it’s unclear how the company will be able to survive much longer. In 2012 the company lost $53 million on $156 million in revenue, and with only about $60 million in cash on the books things need to turn around quickly for the company to survive. The business model, while not a bad idea, doesn’t seem to be working. And, incidentally, Yelp’s new platform may very well directly compete with Angie’s List Inc (NASDAQ:ANGI).

The company is also facing some bad publicity. Just this week a website was launched which claims that Angie’s List Inc (NASDAQ:ANGI) doesn’t screen its vendors and often refers members to felons and risky service providers. It’s unclear whether these accusations are true or how widespread the problems are, but this kind of publicity is the last thing that Angie’s List Inc (NASDAQ:ANGI) needs. If members start leaving then the company will die.

Angie’s List Inc (NASDAQ:ANGI) needs a business model that works, and right now it doesn’t have one. The stock has more than doubled from its 52-week low for reasons beyond me, but the $1.5 billion valuation is ludicrous given the problems at the company.

The bottom line

Investing in companies which are changing their business models is a dangerous game. Without any ability to look ahead 5 or 10 years valuing such companies is next to impossible. The stock prices of these three companies seems to be supported more by hope than by anything real, and it’s hard to justify investing in any of them.

The article The Problem With Troubled Internet Companies originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends OpenTable. Timothy 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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