PSB Monthly Issue June 2015

Invest In The Company That Maximizes The Internet’s Impact On Local Business 

There are hundreds of thousands of small service businesses in the US.  There are over 325 million people in the US as well.  Now clearly, all those businesses exist to service America’s large and growing population.

The biggest problem of course, is matching the right consumers with the right businesses.

Of course, this is the whole point of marketing.  And, it’s why so many companies spend countless dollars on marketing efforts.

But it’s not just the companies…

Consumers often struggle finding the right service company for their needs.  There are so many choices out there.  And, it’s difficult to know who to trust, who is the most qualified, or who’s the most affordable.

That’s where the Internet comes in.

The Web has made is much easier to match consumers and services.  Several Internet companies have sprung up in the last several years to help you find the best businesses for your needs.

These companies tend to focus on local businesses (for obvious reasons).  They usually include a forum for customer reviews.  And, they may include a place for service providers to offer deals to consumers.

In other words, online, local services marketplaces are useful (and important) for both consumers and businesses.

One of the most popular and respected online services marketplaces is Angie’s List (NASD:  ANGI).

The Local Services Marketplace Business

ANGI operates an online, local service marketplace and consumer review site primarily for US consumers.  The company’s marketplace provides a place to research, shop for, and purchase local services.

The company’s service providers are for home, health, and automotive service needs.  The various providers cover 253 markets and 720 different categories.  The site also allows consumers to review and rate various providers.

Just to give you some idea of how big ANGI has gotten, there are over 50,000 participating service providers for over 3 million paid subscribers.  That amounts to between $10-$15 billion in total transactions.

The company earns about 30% of its revenues from consumer subscribers.  The other 70% comes from service providers for advertising and other services.

It may make sense for providers to pay for ANGI services, because it’s marketing.  But why would consumers pay when there are free alternatives?

That’s what makes Angie’s List special.

You see, the company’s review process and provider rankings are quite a bit more reliable than other sites.  ANGI management focuses on quality with its ranking and review system.

For instance, unlike other sites, customers cannot leave anonymous reviews.  Moreover, all data collection is certified, so fake reviews can be avoided as much as possible.

What’s more, companies that don’t average a ‘B’ ranking are removed from the vendor lists.  And, any complaints about service providers are resolved by Angie’s List itself.

The Numbers 

ANGI’s novel method of running an online services marketplace has resulted in steadily growing revenues and membership.

First quarter revenues came in at $83.5 million, a 15% year over year increase.  The revenue growth was driven by an 18% increase in paid memberships.  Meanwhile, adjusted EBITDA of $8.6 million shows a vast improvement over last year’s first quarter loss of $0.6 million.

The notable increase in adjusted EBITDA (a good measure of meaningful business improvement) was at least partially driven by lost costs of obtaining members.  Marketing costs per paid subscriber dropped from $82 to $71 in a year’s period.

ANGI’s balance sheet is also in good shape.  The company has $77 million in cash compared to $59 million in debt.  Operating cash flow of nearly $11 million per year can easily cover any debt expenses, freeing up the cash for accretive purposes if necessary.

Investment Risks 

As with any small cap investment, ANGI does have a few risks. 

A slowdown in the overall economy could lessen the demand for overall services, which clearly would negatively impact revenues.

Additional or growing competition, particularly from bigger players in the space, could make it harder for the company to grow revenues.

Finally, it may become harder or more expensive to secure new members over time, which could hurt the bottom line.

Potential Return of 100% or More

ANGI has shown plenty of growth in revenues and members.  The company provides a much needed service for a huge potential market.  And, ANGI’s financials are mostly solid across the board.

Yet, the shares are trading at just 1.1x sales.

That’s a low ratio for just about any industry, but particular for this space.  The company’s competition tends to trade at closer to 3x sales.  That means the stock surely has room to climb.

Based on our analysis, we see ANGI climbing to $12.60 a share or more.  Buy the shares now for potential gains of 100% or more!   

KEY INVESTMENT DATA

Name:                                               Angie’s List Ticker Symbol:                                            ANGI Market Cap:                                    $370 million Recent Price:                                             $6.32  PSB Rating System      4.7 Stars  Raging Revenue:  (4.8 stars) The company posted 15% year over year growth on quarterly revenues.  Subscribers also climbed 18% during the same period. Beautiful Books: (4.6 stars) ANGI has over $77 million in cash compared to $59 million in debt.  The company has a good operating cash flow at over $10 million per year. Stellar Structure: (4.9 stars) The company’s insider ownership is at 36%.  In addition, institutions own 79%.  Overall, it’s clear the smart money likes what ANGI has to offer as an investment. Valuation Verification: (4.6 stars) ANGI is trading at just 1.1x revenues, easily under half the industry average.  Given the valuation, the shares could climb 100% or more. Meaningful Milestones: (4.8 stars) Angie’s List is celebrating its 20th anniversary, a big milestone for an Internet company.  The company also recently launched new mobile apps, a weekly digital magazine, and an online marketplace for pre-packaged local service offerings.

Action Recommendation

BUY Angie’s List (NASD: ANGI) up to $6.90 per share. 

Recent price is $6.32 

Use a stop-loss of $4.50 on this position. 

Don’t forget your position sizing and stop-loss rules. 

 

Position Updates

Here are some highlights from the past couple weeks…

• JAKKS Pacific (JAKKS) has reached a new high since our last update.
• USA Technologies (USAT) has had its peak return breach 100% for the first time
• The fundamentals have changed for both Profire Energy (PFIE) and DryShips (DRYS) to the point where they are no longer worth holding in our portfolio. It’s time to close out both positions.

Category: PSB Monthly Issues