My Problem With The Angie's List IPO (ANGI)

Angie’s List Inc. (NASDAQ: ANGI) is entering the world of public companies and the initial public offering raised $114 million.  This is a consumer review website and it claims to have over 1 million paid subscribers now as of October.  Rather than just covering contractors, Angie’s List now reviews providers of more than 500 categories of services.

The total offering was 8.8 million at $13.00 per share, at the top of the proposed $11.00 to $13.00 price range. Angie’s List is a company which many investors might take a pass on because it is easy to argue that the company does not really need to be public.  But the other side of the argument is that any company that has 1 million subscribers DOES deserve to be public.  If you just take the offering result at face value since it priced at the top-end of the range, Angie’s List passes the smell test.

So, with a gain of 46% in revenues in the first three quarters of 2011 over 2010 ($62.59 million in 2011 versus $42.93 million in 2010), why is there “A Problem”??? The problem is that the net loss widened out to $43.2 million from close to $19 million a year earlier’ first nine months.  The company has incurred net losses since inception and had an accumulated deficit of $160.6 million as of September 30, 2011. The shares being sold by the company itself (not the shares sold by insiders) are earmarked for advertising and for increasing membership.

The first of the “risk factors” is where the problem comes up after the losses above: “We have incurred net losses since inception, and we expect to continue to incur net losses as we continue to invest aggressively to grow and penetrate our markets.”  The company is also in 175 major markets now, so how many markets are there for unlimited growth even though it specifically identifies New York City and Los Angeles (and internationally) in the filing?

Online companies are supposed to have a significant leverage over brick and mortar outfits.  Aggressively adding personnel and adding infrastructure is the obvious culprit, but if an online subscription service of this sort is not profitable with 1 million paid members and if it expects to keep losing money while it adds members, where is the future “E” in the P/E analysis?

The audience is an attractive one: typical members are aged 35 to 64, married, owning a home, college educated, and with annual household incomes of at least $100K.  In 2010, its members averaged 11.4 unique searches per member for local service providers and 37% of its members wrote a review on at least one service provider.

The filing noted that Angie’s List had cash of $10.5 million at September 30, 2011 for working capital purposes, although its “pro forma as adjusted” figure shows $82.7 million.  After we looked at the revenues, the service provider revenues are growing faster than the membership providers and the service provider revenue versus the membership revenue was $38.5 million versus $24.08 million.  It is easy to argue that providers are far more able to ramp up in spending than 1 million members

BofA Merrill Lynch led this underwriting effort, and it has many co-managers: Allen & Company, Stifel Nicolaus Weisel, RBC Capital Markets, Janney Montgomery Scott, Oppenheimer, ThinkEquity, and CODE Advisors.

This is not meant to just be a bashing session.  Frankly, the company’s growth has been very impressive and its group has grown much more than a 40+ year old male (that’s me) would have guessed from the start.  The fully diluted share count outstanding (if the underwriting group takes the overallotment) is roughly 56.9 million shares.  That generates a market cap of close to $740 million.

Determining the value here is something that investors probably have to be looking for out to 2013.  This one just seems too highly valued for now for our own taste.  Then again, we do tend to be conservative in valuations.  Who knows, maybe every service provider out there will have to not worry about the Better Business Bureau ranking and say “We have a great ranking on Angie’s List.”  Can the IPO rise? Sure.  We’ll review this one later after the dust settles from the IPO and after we can see more about how it really progresses as a public company.

The FULL SEC FILING is here.

JON C. OGG