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Angie's List: Don't Get Too Enthusiastic

 February 27, 2013 10:13 AM

(By Aristofanis) Angie's list (ANGI) is a site that provides its members information for the best available technicians (roofers, plumbers, house cleaners etc.), doctors and automotive services in their area. The company makes money through the membership fee of consumers and also from the companies that are advertised on the site.

About 2 weeks ago, Angie's list announced its 2012 earnings. The company finished the year with a loss $0.92 per share. However, it made a profit $0.04 per share in the last quarter of 2012 (vs. expectations for a loss $0.02), which resulted in the stock skyrocketing from $14 to $17 (21% increase) in just a few hours.

[Related -Angie's List Inc. (ANGI) Q2 Earnings Preview: Trending Towards a Smaller Loss than Expected]

In my opinion, the spike of the stock was mainly due to intense short covering and not due to impressive results. It is remarkable that 30.7% of the float was a short position to the stock before the earnings announcement. Moreover, the trading volume on the day after the announcement was more than 10 times higher than the average volume of the stock (7M vs. 0.6 M, respectively). This reveals closing of short positions in panic.

The enthusiasm from the results is not likely to be sustained due to a number of reasons.

1. The book value of the company is $5.3 M whereas its current market value is $935 M! In other words, the stock market values the company 176 times higher than its book value.

[Related -The Best Of Three Tech Shorts]

2. Despite the positive results of Q4-2012, the company is still expected to lose about $28 M in 2013. Its current assets are $80 M, and its current liabilities are $71 M. Therefore, the company will have to find at least $19 M in 2013 to cover its losses, which will definitely not be beneficial to its shareholders. The company may have to issue new shares or increase its long-term debt. The former option will promptly beat the stock, whereas the latter option may defer the inevitable for a bit later.

3. The company boasts that it has increased almost 5 times its revenue in the last 4 years. This is true but it has also markedly aggravated its losses and has tripled its operating losses during this period. An operating loss means that the company is losing money even if its interest expense is ignored. Moreover, the fact that the great revenue increase has aggravated the losses simply means that this business is not profitable. The main reason for this should be the fact that the company competes against sites that provide similar information but are free to consumers.

4. In each of the last 7 years, the company has recorded pronounced losses. The past performance of a company may not be binding for its future, but it is definitely a significant indicator of its earnings capacity and its future prospects. That's why the past performance of a company is the Number 1 criterion of Warren Buffett when he considers an investment.

Conclusively, the innovative idea of the company may be good, and it may be helping consumers find the best for them but making money is a completely different, much more difficult story.



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