Angie’s List Imploding

Several social media stocks that went public last year are dealing with stock lock-up expiration periods this year. Not only are leaders like Facebook witnessing strong declines following the expiration period, but other players haven’t been spared, either. Online review site Angie’s List saw its stock price fall significantly the day the lock-ups expired. Add to that a bleak outcome, and things seem to be going downhill for the company.

Angie’s List’s Financials
Angie’s List (Nasdaq:ANGI) has been doing business for 17 years. However, the company has yet to turn a profit. Q2 revenues grew 74% over the year to $36.5 million driven by growth in service provider revenues of 94% to $25.2 million. The company ended the quarter with more than 1.43 million subscribers, recording 74% growth over the year. The cost per acquisition of members grew 2% over the year to $91.

Analysts don’t expect Angie’s List to turn in profitable in the coming quarters, either. Loss per share expected for the current quarter has widened to $0.30, compared with projections of $0.29 loss per share made a quarter ago. For the year, analysts now project Angie’s List to report a loss of $0.99 per share compared with $0.92 projected earlier. The company projected revenues for the current quarter to be in the range of $40.3 million-$41.3 million.

Fewer Customers and Higher Marketing Costs
Angie’s List should also be concerned about the churn rate of their consumers. The company claims that during the quarter, 77% of its members renewed their subscriptions. However, what the company did not divulge is the number of consumers who cancelled their subscription before the end of the month. Analysts estimate that if those numbers were to be included, it would become apparent that the Angie’s List customer renewal rate would be less than 69%, suggesting that nearly one customer is lost for every three customers retained.

In addition, Angie’s List faces a daunting task in increasing its advertising dollar share because bigger players like Google are already in its space. More so, social media players, such as Facebook are also stepping up efforts to increase their share of advertising revenues.

Finally, marketing costs are growing relentlessly. For every market that Angie’s List wishes to address, it has to set up a salesforce and infrastructure to support it. During the quarter, selling expenses were up 89% to $14.3 million as the company continued to hire more sales representatives. Marketing spending is projected to increase to $26 million-$27 million in the current quarter. Surely, there is no sight of profits in the near future.

Their troubles bring me back to the point I have raised several times – Angie’s List needs to come up with a better monetization strategy. As Mark A. Holder, chief investment officer of Stone Fox Capital Advisors says, their business model itself is worrying given that it relies on selling online reviews, which today are available free. This business would have worked fine as a bootstrapped, private business. It doesn’t have scale characteristics, and you see its struggle in the public market.

The stock tumbled to a 52-week low of $8.98 last week. It is now trading at $9.56, with a market capitalization of $568 million. The stock touched a high of $19.82 in March 2012.