Why Angie’s List Inc (ANGI) Beats Yelp Inc (YELP)

Indianapolis based Angie’s List Inc (NASDAQ:ANGI) has been lifted to a buy rating. The stock’s price target was lifted from $29 to $31 per share by the Midwestern firm Stifel Nicolaus. Northland Capital Partners previously (Spring of 2013) raised its price target for Angie’s List shares from $24 to $30. Angie’s List, the consumer-based referral membership for local service providers and professionals is slowly but surely surpassing Yelp Inc (NYSE:YELP) in the local recommendation space. Angie’s List has morphed into a premium Internet platform with brand awareness and lots of momentum. With word of mouth and more importantly, lots of paid advertising, Angie’s List Inc (NASDAQ:ANGI) has become mainstream. It took Angie’s List 16 years to get 1 million members. It took it 18 months to get 2 million users. This type of growth in paid membership is very impressive. Yelp Inc (NYSE:YELP) had better take note — Angie don’t play.

Yelp me, I can’t get up

Yelp has users — lots of users. Yelp had more than 100 million unique visitors in January of 2013. Massive growth — but that growth is uneven. Yelp, like Angie’s List Inc (NASDAQ:ANGI), has yet to turn a profit. What makes Yelp’s situation more precarious is that it does not have paying users, Angie’s List does — 2 million of them. Yelp Inc (NYSE:YELP) is betting on mobile, but who isn’t these days? Yelp is also having the same review quality “issues” that Angie’s List has. Bogus reviews, overly picky customers, poor vendor control, etc… The local recommendation space is riddled with pitfalls — legitimate and potentially off-putting that could sink any well-meaning brand. While both Angie’s List and Yelp Inc (NYSE:YELP) have issues, Angie’s List has a clear advantage because from the onset, it charged for its “special sauce.” Long ago Angie’s List knew the value of local recommendations and does not have to figure out how to squeeze profit from its brand.

Another major concern is Yelp’s reliance on Google Inc (NASDAQ:GOOG) for traffic. Relying on Google is not a business strategy — it’s dangerous. Another issue is the 700 complaints against Yelp filled with the FTC. Yelp Inc (NYSE:YELP) must get a handle on these types of issues before users decide to move on to using just Facebook or (gasp) Angie’s List Inc (NASDAQ:ANGI) for their local recommendations. On a good note, Boston Consulting Group showed that a local business saw an average sales boost of roughly $8,000 by using a free Yelp business account — Yelp Inc (NYSE:YELP) must do more to capitalize on this (vendor paid memberships anyone?) in the near future.

All is not well

Angie’s List Inc (NASDAQ:ANGI) is not perfect — it has some significant quality assurance (QA) issues. Angie’s List has also alienated many vendors by not addressing unfair ratings. Vendors don’t like the scarred reputations caused by sometimes vindictive members. Some Angie’s List business practices have raised eyebrows. CEO Bill Oesterle has been collecting rent from Angie’s List by renting his Indianapolis property to the company. Oesterle recently sold that property to Angie’s List. Needless to say, that property was sold “well above” assessed value — Angie must not use her own service. Transparency is a major issue that Angie’s List must deal with appropriately. Also, contrary to its  advertising — local companies do pay to get on Angie’s List.

Only $14.6 million of the company’s $52 million in revenue was from paid subscribers. Most of the revenue is from vendors — they pay quite a bit to get on Angie’s good side. Right now, Angie’s List Inc (NASDAQ:ANGI) is playing both sides of the fence. It takes money from vendors, and puts them on Angie’s List — while charging members to have access to Angie’s List. Based on member and vendor comments from a 2012 New York Times review this “double dip” approach does not pass the “smell test” with many once-satisfied customers.  Angie will have to find a way to make this work or users will leave Angie’s List faster than you can say “MySpace.”