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Angie’s List Inc (ANGI) Valuation Discrepancy Still Not Attractive

Though Angie’s List Inc (NASDAQ:ANGI) continues to produce extremely fast revenue growth, the market was disappointed with the forward guidance for Q3. The provider of verified user reviews showed a large increase in operating leverage though the level of losses might continue to scare off investors.

Angie's List Inc (NASDAQ:ANGI)Angie’s List Inc (NASDAQ:ANGI)’s valuation continues to make an interesting debate between it and fellow consumer review site Yelp Inc (NYSE:YELP) . Both stocks have had huge gains over the last year based on surging demand, whether using the required membership method at Angie’s List Inc (NASDAQ:ANGI) or being free to the public at Yelp Inc (NYSE:YELP). Both face increasing pressure from the behemoth Google Inc (NASDAQ:GOOG) that continues to integrate reviews into an ever-increasing Google Maps product.

Increasing operating leverage

Angie’s List Inc (NASDAQ:ANGI) reported Q2 2013 numbers that were generally in line with expectations as revenue surged 62%. Operating leverage improved dramatically compared to last year as the company was able to generate over $22 million in higher revenue off marketing spend that was virtually flat. Sure selling expenses surged over 50%, but the total operating expenses were held in check, as the total increase was only $13.5 million compared to the revenue gains.

The company is already proving that the cohorts opened prior to 2008 are producing revenue in excess of the marketing spend. The 10 cohorts that have been around for more than 10 years that naturally include the biggest markets in the US generate revenue of more than 4 times the marketing spend. The interesting study will be the 96 markets opened post 2010 that only average $15,000 in revenues while spending an average of $56,000 on marketing. Will these markets below the 150 largest metro areas provide the size and scale to turn profitable?

Comparing the user base

Yelp won’t report updated user statistics until July 31, but the company had over 100 million monthly unique visitors in March. Conversely, Angie’s List Inc (NASDAQ:ANGI) only has 2.2 million paying subscribers. With a solid base that includes over 100,000 paid households in the cities of Los Angeles, New York City and Washington D.C., it generally lacks the review base in most cities outside the top 10 metro areas.

Though Angie’s List Inc (NASDAQ:ANGI) did get an earlier start, both companies have comparable revenue bases, yet Yelp has a substantially higher market cap. Part of the valuation difference has to due with the vast difference in attracting user reviews. The market clearly prefers the larger user base and geographical expansion of Yelp. Yelp is worth over $2.7 billion while Angie’s sits at only $1.4 billion. The market might also prefer Yelp reporting numbers closer to breakeven in contrast to large losses at Angie’s.

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