The market is underpricing a possible return to profitability for $ANGI, and the stock is down -28% since April.
Along with enacting structural changes to boost revenue models, the parent company of $ANGI has spun off its other company, Vimeo, to refocus long term value creation in $ANGI
There is a large margin of safety if you buy shares at the current price; The earnings date of August 4, 2021 could also be a major catalyst .
ANGI operates leading home services marketplaces in the US and several international countries, with major brands including
ANGI’s marketplace is number 1 in revenue, service pro network, sales force size, service requests, and fixed price. ANGI generates revenue in 3 primary ways across 3 business models:
Advertising model on top of an online directory of home services providers with customer reviews
Marketplace model which matches customers to local service providers, with a fee for introductions
Fixed price model where ANGI sells services directly to homeowners at a pre-determined price and then fulfills the order on the back end, earning money on the delta. IAC has an 85% economic interest and 98%+ voting interest in ANGI, and ANGI is IAC’s first or second most valuable asset depending on the value of Vimeo, which will soon be spun off from IAC.
ANGI operates in a $500B+ (US) fragmented home services market, one of the last commerce categories where the vast majority of the market is offline.
This will evolve over time, albeit slowly, as a multi-decade demographic shift is underway as Millennials/Gen Z become homeowners and are more comfortable managing home needs via a digital service.
The time to own ANGI is now as the company is facing an inflection point driven by a confluence of factors.
On the Q1’21 earnings release, management emphasized two strategic priorities.
After 18 months of trialing a fixed price model, management has observed sufficient positive signals to believe the model will work and therefore is investing heavily behind the strategy.
The company announced the consolidation of brands under one unified Angi. Bringing focus, efficient resource allocation, and brand building. In doing so, management de-risked EBITDA margins for the next 18 months, resetting expectations, while simultaneously projecting a return to 20%+ reported revenue growth exiting 2021, indicative of their focus on long-term value creation.
At the same time, another event is approaching – IAC’s spin-off of Vimeo. After this, ANGI will be IAC’s most valuable asset – next in line, so to speak – creating an increased focus from IAC on ANGI and increasing the probability of successful execution.
ANGI trades at 3.6x EV/’22 consensus gross profit, well below all marketplace peers and slightly above YELP.
3.6x EV/’22 GP suggests the market is skeptical of both (1) ANGI’s short-term ability to reinvigorate top-line growth and (2) the medium to long-term EBITDA margin and FCF profile of the business.
The post-Q1 earnings pullback coupled with recent market forces present a compelling entry point. Fueled by fixed price and an integrated suite of other services, ANGI can return to sustained mid-high teens gross profit growth exiting 2021 and establish itself as the winning aggregator in the home services category.
Business model evolution – shift to fixed price
It is relevant to understand the evolution of ANGI’s business model. Angie’s List began as and remains a specialty advertising platform for SMBs, creating an online directory akin to Yelp for home services professionals (“SPs”).
Through this model, they basically digitized the Yellow Pages by aggregating fragmented supply of SPs online, providing SPs with a higher degree of targeting and consumers with a higher degree of self-regulated vetting via customer reviews. SPs pay Angi to advertise on the platform.
In 2017, IAC acquired Angie’s list for ~$500M and merged it with HomeAdvisor, IAC’s home services marketplace, creating a new public company, ANGI Home Services. This shifted business models from online directories to online marketplaces, while increasing scale for both platforms.
In the marketplace model, vetted SPs pay for introductions to prospective customers. Customers review SPs, creating a self-regulating system to maintain an acceptable degree of supply quality.
If reviews are too negative, Angi proactively removes those SPs. Angi again raised the bar relative to other means of procuring local services on a key pain point in local services: spotty reliability and quality.
ANGI accomplished two challenging things, albeit imperfectly:
Aggregated fragmented, hyperlocal supply
Theoretically raised the minimum quality bar (even if only slightly) via reviews and company vetting. T
The marketplace model has achieved national scale, having grown to offer coverage of 500+ home services tasks offered by 250k SPs across 400+ geographies with no significant concentration.
A key issue remained: friction. For suppliers, they were introduced to prospective customers but left on their own to close the deal. For consumers, they were introduced to potential suppliers but still had to decide, haggle over terms, and endure aggressive sales tactics.
Enter, on-demand fixed price.
In November 2019, following the Handy acquisition, ANGI’s HomeAdvisor announced a new, on-demand way to get home projects done, “from painting a house to unclogging a drain” for homeowners. The “fixed price” model. The customer sees transparent pricing, pays ANGI upfront through the site, and schedules the job on the website or in the app. ANGI fulfills the job on the backend with a vetted SP and provides a satisfaction guarantee. This theoretically eliminates friction on both sides of the marketplace – for consumers, no more pouring through reviews, comparing price, or haggling; for suppliers, accept a reduced fee in exchange for guaranteed demand (i.e., eliminate the risk that your lead fails to convert).
Advertising model to marketplace model to fixed cost on-demand model. A hybrid of the 3 is the likely end state, but the evolution of models is logical.
This is what Millennials and Gen Z – the incoming cohort of homebuyers – will likely demand.
A frictionless, transparent, online, app-based direct do-it-for-me-right-now model with a satisfaction guarantee. They may even want a subscription. In transitioning to fixed price, ANGI is shifting their focus from supplier-led to consumer-led as they commoditize the supplier and attempt to please the consumer. This is important as for a lower-frequency marketplace model to succeed, homeowner mindshare is paramount for driving recurring revenue. Said differently, ANGI needs a homeowner to open the ANGI app every time they need any home service.
The model goes a step further in filling a market void. Today, large players in some sub-segments offer reliability, but charge extreme premiums over mom and pops. Mom and pops are cheaper but unreliable. ANGI aims to bridge the gap – cheaper than big guys, more reliable than mom and pops. They do this by leveraging their aggregated supply base, selecting the best providers, and guaranteeing consistency and reliability, creating a positive consumer experience.
ANGI is well-positioned to win in fixed price. Success requires supply liquidity such that a job can be fulfilled and homeowner aggregation with mind share and brand trust.
ANGI accounts for 2 out of its homeowners’ 6-8 annual jobs; this increases as offerings are integrated (chart below). ANGI is evolving from a lead gen marketplace to an integrated home services platform. Book a job directly through the platform, pay through the app at a discounted membership rate, and subscribe to have the job completed at recurring intervals, and finance it through Affirm.
If you have supply liquidity such that when a consumer needs a pressure washer this week, that can be provided with a timely, affordable, quality experience, the consumer is likely to return to the ANGI app when she needs to fix the shower drain. Accomplish this and homeowner mindshare will shift to the ANGI app for all home needs, yielding strong consumer LTV and cohort performance even if individual projects are low frequency or non-recurring. The business will not have 10/10 network effects, and it does not need to.
The Q1’21 IAC shareholder letter begins with the following:
“Our biggest asset at the moment, ANGI, is in the midst of creatively disrupting the home services industry (and itself) by offering something magical – one-click ordering of home services that delight homeowners with simple pricing, no-hassle payment, and guaranteed service.”
Management articulated two strategic priorities in the Q1’21 earnings release: they are all-in on fixed price, having seen enough signals to believe that it will work, and they are unifying under one brand, ANGI.
A unified brand drives marketing efficiency, focus, and is superior to multi-brand for aggregating consumers. Fixed price under a unified brand is the correct long-term strategy, and there is clarity on the business trajectory and financial investment supporting it.
Margin expectations were reset for 2021-2022, guiding to single digit EBITDA margins in 2021 and likely into 2022 due to fixed price investment and profit headwinds from brand unification.
Top-line growth projections were favorable. Management expects a return to 20%+ reported revenue growth by Q4’21 and an acceleration from there, which will drive teens gross profit growth (given lower margin in fixed price model based on the company’s reporting methodology).
So, short-term margin headwinds to invest behind a strategy that will return the business to high growth and drive superior long-term positioning.
This happened in parallel with IAC’s spin-off of Vimeo, which occurred in Mid may 2021.
This will shift IAC focus to ANGI, increasing confidence in ANGI’s ability to execute from here. The spin may also create technical pressure to the upside on ANGI shares as shorts (in a long IAC / short ANGI pair) cover, but that is not a core part of this thesis.
The margin reset along with recent market forces creates a compelling entry point for the stock. Right now $ANGI is at around $11/share. Using a 2 stage discounted Cash Flow rate, I think it can ultimately reach $30/share. Let me explain why.
Discounted Cash Flows (DCF)
DCF is the most widely-accepted method to calculate the fair value of a company. It is based on the premise that the fair value of a company is the total value of its incoming cash flow less its expenses, technically called Free Cash Flows (FCF), discounted to today's value.
2-Stage Free Cash Flow Model – How Is This Calculated?
Two calculations are performed: high-growth stage and stable-growth stage. In high-growth , estimates over the next ten years of levered free cash flow to equity are used, which is sourced from market analyst consensus estimates. If no estimates are available, then the last estimate or reported value is extrapolated using the historical average annual growth rate. The following years are then forecast to grow, but with the growth rate reducing each year, until it reaches the long-run stable growth rate.
In stable-growth, a terminal value is calculated using the Gordon Growth formula, with an assumption that the company will continue to grow its earnings at the 10-year government bond rate, forever. The sum of the cash flow arising from the forecasts are then discounted to today's value using a discount rate, then divided by shares on issue, giving a value per share.
Below are the data sources, inputs and calculation used to determine the intrinsic value for Angi.
An important part of a discounted cash flow is the discount rate.
The calculations below outline how an intrinsic value for Angi is arrived at by discounting future cash flows to their present value using the 2 stage method.
Using analyst's estimates of cash flows going forward 10 years for the 1st stage, the 2nd stage assumes the company grows at a stable rate into perpetuity.
I don’t have a finance degree so take this with a huge grain of salt…. But the math suggests that shares are trading at a ~60% discount.
For reference the chart below highlights the monetization upside relative to peers and market size:
The cherry on the icing is that over the past few weeks, there have been large hedge fund buys done off the market exchanges. Likely because they want pick up shares at a discount price, thus keeping retail investors in the dark until the stock price pops off.
Blue = hedge fund buys + volume weighted to on-exchange buys from retail investors
Green = current price + volume on brokerages
De-risked 2021-2022 margin expectations in Q1'21 earnings release / management guidance
Increasing investment in the fixed price model because management has seen enough to believe it will work
Unifying under a single brand, Angi
IAC / Vimeo spin increases IAC's focus on ANGI
Earnings release in early August