Should Yelp Start Worrying About Angie's List?

  • Angie's List, one of Yelp's biggest online review rivals, plans to make a major change to its website.
  • Angie's List will remove its paywall and essentially make the site a free-for-all just like Yelp.
  • What is the implication of Angie's move on Yelp?.

For a long time now, Angie's List (NASDAQ:ANGI) has remained one of Yelp's (NYSE:YELP) most formidable rivals. Angie's List owns the bragging rights as the oldest online review site having been founded almost a decade before Yelp came into being. Other rivals such as Alphabet Inc-C (NASDAQ:GOOG) + Local Reviews only became refined much later.

Despite enjoying first-mover advantage, Angie's List has not been able to match Yelp on the growth front. You can easily tell this by having a peek at each company's latest quarterly report. During the last quarter, Angie's List reported Q1 2016 revenue of $83.68M, good for an anemic 0.4% Y/Y growth while net income clocked in at-$4.0M (EPS OF -$0.07) compared to net income of $4.4M (EPS of $0.07) the previous year. So Angie's List has basically stopped growing and tragically slipped into the red once again.

Meanwhile, Yelp is a different story altogether. For all its troubles, Yelp has been able to maintain top line growth at least in the mid-30s percentages for several quarters. Yelp reported Q1 2016 revenue of $158.6M, good for 33.8% Y/Y growth while net income clocked in at -$15. 452M, or EPS of -$0.20 compared to net income of $1.284M, or EPS of -$0.02 in the prior year. Yelp has had little trouble maintaining impressive revenue growth, though its high cash burn rate and ballooning costs have resulted in swelling losses.

But perhaps the biggest difference between Yelp and Angie's List lies is their ad growth rates. Local ad revenue accounts for the bulk of each company's revenue. Yelp's local (ad) revenue growth jumped 40% Y/Y to $138.1M mainly due the growing popularity of its mobile app.


Source: Yelp Q1'16 presentation

Meanwhile, Angie's List reports ad revenue as revenue from ads purchased by service providers rated on its website. The company's Service Provider revenue during the last quarter clocked in at $67.522M, up a mere 2% Y/Y.

Angie's expects full-year revenue to clock in at $345M-$355M which pales in comparison with Yelp's expected revenue of $690M-$702M over the same period.

Angie's List Plans to Remove Paywall

So Angie's List appears to have much slimmer growth prospect than Yelp, and there is a good reason behind this--Angie's List is a subscription-based members only review site that requires users to pay a subscription fee before they are allowed to post. In sharp contrast, Yelp is essentially a free for all where anybody can post their reviews. During last quarter, Angie's List reported membership revenue of $16.334M, down 5.8% Y/Y. Angie's has 3.3M paid memberships with a renewal rate of 73%.

Angie's paywall is essentially the biggest reason why the company's growth has been anemic compared to Yelp. The company says its receives more than 100M unique visitors to its site every month but the vast majority end up bouncing due to the paywall. The huge number of unique visitors on Angie's site tells you that the website is still very popular with consumers. For comparison purposes, Yelp sports about 150 monthly active users, so Angie's List is not far behind.

But Angie's List now plans to remove its paywall this summer. The company is already experimenting with a freemium model in several markets and says that these have been showing better metrics than in controlled markets.

There is a good reason why people still use Angie's List for their reviews despite the availability of free review sites such as Yelp. When you are looking for a contractor to install a new garbage disposal unit or paint your house, the place to go is Angie's List whereas Yelp's reviews can be largely unhelpful for such purposes. Angie's List is dedicated to help users find the best contractor to do various tasks. Moreover, Angie's membership plans start as low as $3 and $4 per month. Consumers who regularly hire out services such as landscaping and home renovations find Angie's List an invaluable tool.

Your guess is as good as mine that Angie's List will become an even more formidable competitor for Yelp once it removes the paywall and allows people to freely post their reviews with no limitations. But how much will this threaten Yelp?

Yelp's Mobile App Gives it an Edge

The rapid rise of Yelp's mobile app, however, gives it a unique edge over rivals such as Angie's List and Google. About a year ago, Yelp was ranting about Google giving its own reviews preference in search results even when people specifically requested for Yelp reviews. But Yelp's mobile app has increased in popularity in a short space of time thus helping the company rely less on Google and avoid head-on competition with other review sites such as Angie's. Yelp's App Unique Devices grew 32% last quarter to hit 21M. Engagement rates on the app are great with app users viewing more than 10 times as many pages as people who access Yelp via its website. More page views of course means higher ad revenue for Yelp.

So while Angie's decision to remove its paywall could easily have dealt a serious blow to Yelp a few years ago, this is not the case anymore. Yelp's mobile app has proved to be the company's white knight and it no longer has to fear its review rivals as much as it did not too long ago.

Despite moving deeper into the red, Yelp's accelerating ad growth got investors excited during the latest earnings call and Yelp shares gained almost 25%. Yelp is yet to figure how to turn a profit consistently due to high marketing expenses. The company's S&M costs jumped 51% Y/Y to $95.628M. Marketing expenses now gobble up more than 60% of Yelp's revenue and remain the company's biggest cost line item by far. But at least Yelp has proven to investors that it still has ample revenue growth runways and that removes a major roadblock for Yelp stock.

Brian Wu Brian Wu   on Amigobulls :
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Comments on this article and YELP stock

Yelp is not a sustainable business. Its a hype hoping that a deep pocket will come and overpay for it! Just thinking logically, following are some points:
1. It relies on advertising income:
The company has loaded itself with salespeople to increase revenue. That typically results in a possible initial spike/increase but its short-lived when businesses have time to realize things. And the costs remain high with such a salesforce and will pinch the company.
2. Yelp is losing money:
The company still has an annual loss and that is only sustainable if there is demand for the shares despite the missing fundamentals, and if they can continue to borrow money. That scenario is again short-lived and can turn very suddenly and very quickly (quicker than the recent surge in stock price).
3. The YELP Investor Presentation talks about the substantial growth prospects because of the online category advertising spend. So they make money advertising certain businesses yet they are meant to reflect real reviews in a balanced manner. That same presentation talks about enhanced profile and removal of competitor ads. Their revenue model is in conflict with their own public offering. Again, not a sustainable formula.
4. Reviews get old and out-dated. In today's world, the only constant is change. If businesses do not change, they die. Reviews are there to stay for life, so they reflect an inaccurate image of what they are meant to show.
In short, this is an overvalued stock and its high marketing costs and losses cannot continue indefinitely. Once the hyped interest in its stock is gone (and its only there based on speculation without any real fundamentals), it should come down quick than it went up in the recent months since Q2 results.
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