On November 28, 2012 I wrote an article looking at several analyst upgrades, one being Angie’s List Inc (NASDAQ:ANGI). In the piece, I commended Northland on its “Outperform” call, and its conclusion that the stock was trading at a 44% discount to its peers. Upon further research and realizing the value presented, I added ANGI to my Motley Fools CAPS picks, told you to add it, and then purchased a small position in the stock. In addition, I also said that it was presenting positive signals most of the value indicators outlined in my book (“Taking Charge With Value Investing” (McGraw-Hill)). My only regret is that I didn’t make the stock a larger position, yet now with it trading at new highs, many are jumping on the bandwagon, while the question remains if now is still a good time to buy.
What’s creating the “buzz”
There’s obviously a big difference in Angie’s List back when I said to buy at $11 versus today at $25. During the final two days of last week the stock rallied 25% as the company exceeded earning expectations. For the quarter, the company beat on both the bottom and top line with revenue growth of 68% year-over-year (yoy) and also increased guidance. The company’s service guidance, closely watched, grew by an even greater 78% margin. In addition, total paid memberships are now approaching two million, as it rose 60% yoy.
When you look at Angie’s List’s quarter there isn’t much negative that you can say. However, with social media companies, the question is not growth, but rather valuation. Back when Angie’s List was trading at $11 there was no social media company in the space with better metrics and equal growth. Hence common sense suggested great upside. But let’s see how it stacks up with other social media companies of the same size.
How to “value” the expensive social media space
| Angie’s List | Zynga (NASDAQ:ZNGA) | Zillow (NASDAQ:Z) | Yelp (NYSE:YELP) | |
|---|---|---|---|---|
| Market Cap (millions) | $1,460 | $2,630 | $1,890 | $1,620 |
| Forward P/E | 96.88 | N/A | 67.87 | 90.71 |
| Price/Sales | 9.64 | 1.92 | 16.58 | 11.77 |
| Revenue Growth* | 68.20% | N/A | 72.60% | 65.30% |
| Operating Margin | (32.31%) | (6.59%) | 5.99% | (12.0%) |
*last quarter yoy growth
While the P/E ratio is without question the most popular stock metric among retail investors, it is also among the most useless when comparing fast-growing social media companies. The reason is because companies such as these are not worried about margins. They are public companies with large cash positions, thanks to venture capitalists and IPOs, therefore use the cash to invest in growth. The forward ratio can be used as a metric of progress, as analysts often base their earnings expectations on assumed margin progression. If that’s the case, then Zillow will be the most efficient, although when looking at current operating margins, there’s little denying that Angie’s List is expected see the greatest level of operational improvements.
More importantly than earnings and margins is revenue and revenue growth for social media companies. This is the metric that investors use to gauge a social media company’s “coolness” or its continued momentum. In social media, comparing sales growth to a stock’s price/sales ratio can be very telling, and you must remember that sooner or later all of these stocks will consolidate and trade with metrics that are consistent with market averages (price/sales ratios between 3.0 and 5.0). Therefore, with high expectations, investors demand explosive growth, and any sign of weakness can be viewed as a stock-crushing weakness.
A side-by-side comparison in social media valuation
Zynga is in a world of its own, as compared to these three companies. It has zero growth and has seen its stock decline almost 65% over the last year alone. Yet back in early 2012 the company traded with a price/sales of 8.0 as revenue grew more than 70% year-over-year. Since then, ZNGA has pulled back, and with its business being speculative in nature, it now trades at a multiple to sales that is below the market average. Zynga is a great example of what can happen to a social media stock when its company becomes “uncool.”
The other three (Yelp, Angie’s List, and Zillow) are near identical in terms of growth and even market capitalization. Yet despite Angie’s List’s 150% return since my investment, it is still cheaper than both Yelp and Zillow. Zillow is by far the most expensive, trading with a 70% premium to sales versus Angie’s List. Yelp is slightly more expensive than Angie’s List, however both Yelp and Zillow have better margins and are more efficient businesses. Hence both trade at higher premiums due to both being in the process of becoming profitable. Therefore, with these things in consideration, Angie’s List no longer presents the “clear value” to its peers.
Conclusion
Angie’s List is now fairly valued with the rest of the industry, trading at a lower multiple to sales versus the others but only because its path to profitability is longer. In my opinion, there is now no more “value” in this space, all are consistent with how the market values social media, and the fear of becoming “uncool” and the next Zynga is not worth the downside that comes with buying at these levels.
The article Is This High-Flyer Still Presenting Value in an Overvalued Space? originally appeared on Fool.com.
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