Angie’s List Inc (ANGI), Yelp Inc (YELP): Building Value From Other Peoples’ Advice

Most people seem to make purchase decisions based on the wisdom, or peer pressure, from family, friends, or acquaintances. While every business has its share of both fans and detractors, the collective opinion of customers is often a fairly accurate depiction of reality. In the internet age of mass communication, product and service reviews are only a mouse click away, for better or worse. The review aggregators are creating treasure troves of information and gaining significant value in the process. So, which companies are the ones to watch?

While Angie’s List Inc (NASDAQ:ANGI) has been publishing its list of high-quality service providers since 1995, its move to the internet in 2001 significantly expanded its scope of operations beyond a select group of markets. The company’s initial public offering in 2011 gave it further brand-name recognition, as well as providing capital to increase its service categories to more than 500 as of December 2012. The funds also allowed Angie’s List Inc (NASDAQ:ANGI) to target a greater depth of service providers for its 1.7 million subscribers in over 200 local markets around the country.

In FY2012, Angie’s List Inc (NASDAQ:ANGI) posted mixed financial results, with a 73.0% increase in overall revenues compared to the prior year, but another annual operating loss. The company’s sales growth was paced by large gains in its membership base and service provider network, as well as the expansion of its e-commerce unit that offers special deals for highly-rated providers. However, the top-line gains were offset by a steep rise in operating costs, especially in the sales and marketing area, due to a lack of critical mass in most of the company’s new markets.

Looking ahead, management is focused on providing flexibility to its user base by providing a la carte options to its customers, rather than requiring them to subscribe to the entire listing service. In addition, the company is attempting to increase its sales per membership ratio by facilitating transactions through its e-commerce platform. As Angie’s List Inc (NASDAQ:ANGI) gains broad recognition in its new markets, its unit marketing costs should continue to fall, providing an avenue to solid profitability.

Yelp Inc (NYSE:YELP) takes the opposite tack to competitor Angie’s List Inc (NASDAQ:ANGI), by providing free access to its 36 million user reviews of businesses. Instead, the company charges businesses fees for enhanced listing options, as well as deriving revenue from the sale of display and text search advertising. In addition, while Angie’s List Inc (NASDAQ:ANGI) focuses on high cost services, like health care and auto repair, Yelp Inc (NYSE:YELP)’s reviews are more geared toward the leisure market, led by its shopping and restaurant categories.