Since the S&P 500 Volatility Index (^VIX) spiked by more than 6% on Wednesday, it wasn’t a great day for most investors.
Unless they owned shares of Angie’s List (ANGI), that is…
The stock rocketed more than 19.1%, closing at $7.59 on relatively heavy volume.
It represents quite the turnaround, considering that the stock had been in a death spiral for well over a year.
Let’s see how long the momentum will last.
A Growing “List” of Cons
Angie’s List operates a membership-driven solution that enables its users to research and hire local professionals for home, healthcare, and automotive services.
The stock reached a high of $28 on July 5, 2013, but has been in a downtrend ever since.
But shares ratcheted higher when reports surfaced that the company hired investment bankers to explore a possible sale of the company.
Now, if you recall, Karim Rahemtulla mentioned back in May that Angie’s List doesn’t make a strong buyout candidate.
That still holds true today.
Given the current business model for the company, finding a buyer won’t be easy…
You see, the company’s business model is seriously flawed. Angie’s List is unable to continue growing its revenue without dramatically increasing its costs each quarter.
The company’s Q2 2014 income statement illustrates the problem…
Its 10-Q filing showed an 8.6% increase in second-quarter growth over the previous quarter, growing from $72.7 million to $78.9 million.
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Unfortunately, to generate this revenue increase, Angie’s List had to increase its marketing costs by 19.01%, from $11.5 million to $13.7 million.
At a time when most companies are spending less than 4% of gross revenue on marketing, Angie’s List spends upwards of 40% annually to expand its membership rolls.
Again, this is mentioned in the company’s 10-Q, which revealed that Angie’s List spent $59.4 million on marketing in H1 2014, against total revenue in the same period of $151.5 million.
Of course, this unsustainable trend can’t end well. And at this burn rate, the company will increase its revenue right into bankruptcy court!
Perhaps this explains why the company has racked up losses in virtually every quarter since going public.
The End for Angie’s List Draweth Nigh…
The recent spike in price is unlikely to last long, as much of the action was attributed to short covering by a large contingent of shorts, which accounts for 50% of the company’s float.
As the excitement of the recent announcement for a buyer wanes, short sellers will reappear – thus driving the stock down even further.
The only real hope for Angie’s List is a buyout from the likes of Home Depot (HD) or Amazon (AMZN) – companies that have the available cash to transform the business from a paid membership to a free model.
And while a buyer could seize an ample opportunity to garner a broader customer base that Angie’s List offers, the odds of a sale are diminished by the prospects of paying upwards of $500 million (at yesterday’s closing price) on a flawed business model.
But without such a purchase, Angie’s List has almost no chance of surviving into the future.