Competition Is the Reason to Avoid This Internet Company

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Named after one of its founders, Angie's List is a publicly traded company specializing in helping people. The company, which operates the website of the same name, was founded to help consumers find local contractors and professionals through a series of reviews. With its stock trading at a high valuation and new competition coming, investors should sit this one out.

Competition coming
According to a TechCrunch article, Internet giant eBay is testing a local services marketplace in the United Kingdom. The website features off a service called eBay Hire that offers more service categories than Angie's List. The site offers photographers, antique dealers, and other more specialized contracted service providers.

The launch of the service providers marketplace in the United Kingdom doesn't necessarily signal eBay's intent to bring the service to the United States. It seems worth noting in an Angie's List investment recommendation that eBay could bring the service to the U.S. and likely eat into Angie's dominant market share.


In eBay's second quarter, the internet giant posted a 14% revenue increase to $3.9 billion. Its PayPal revenue grew 20% to $1.6 billion, while Marketplace revenue grew 10% to $2.0 billion. The company added 4.7 million PayPal users and ended the quarter with 132 million total users. Imagine if eBay could bring its local services marketplace to the United States through its huge eBay and PayPal user base. Now imagine that when a service provider is selected from its website, a customer could set up a payment contract with PayPal and have a payment go through once the work is done. I think that this would hurt Angie's List beyond belief, as eBay would offer an additional secure payment service that Angie's List is missing as the middle man.

Existing competition 
The bad news for Angie's List is its already strong competition from Yelp . The online community ended its most recent second quarter with 42.5 million reviews. Yelp had a huge second quarter, with revenue up 69%, reviews up 41% and monthly visitors up 38%. The company, through its website and mobile applications, saw 108 million unique visitors in the second quarter.

Yelp is also beefing up its customer offerings with new platforms. The company spent $12.7 million to acquire Seat Me, a service that directly connects customers to online restaurant reservations. Yelp also launched a platform to help restaurants take orders and process transactions that could distance the company's market-leading position away from sites like Angie's List, which only offers reviews. 

Unlike Angie's List, Yelp members do not have to pay a monthly subscription to get access to the reviews. Yelp will continue to see strong numbers as its data is free and readily available. Angie's List will continue to have to convince people that its data is worth a monthly subscription fee. 

Expansion worries
Angie's List has seen its sales and membership numbers grow through a well-thought-out expansion plan. The company has targeted the largest population centers in the United States and seen a huge boost in every area it enters. As the company expands and reaches a large scale, however, its growth begins to slow.

Average revenue per user is much smaller in the small markets Angie's List has recently entered. The good news is that the company's acquisition cost of $80 per user declined 12% in the second quarter. This remains too high for a company that generates its revenue from monthly subscriptions, however.

Earnings
In the recent second quarter, Angie's List posted a loss of $0.25 per share. This met analysts' targets, but the company did fall short of revenue estimates. Total revenue in the quarter grew 62% to $59.2 million, but missed estimates by $0.3 million. 

The highlight of the earnings report was a new record number of members. Total paid members rose 51% to 2.16 million. The number of service providers listed on the site grew 42% to 42,452. These numbers are a little misleading, however, as they relate to Angie's List expansion into new markets.

Conclusion
EBay has been a huge Internet company since its early auction days. The company now dominates the online auction and online payment businesses in the United States. A site dedicated to connecting professionals with customers could help eBay expand its localized presence and could also boost shares of stock. Even though it isn't a big growth driver, eBay shares should be bought on any weakness.

Shares of Angie's List trade close to $25 at the time of writing. In the past fifty-two weeks, shares have gone as high as $28.32. Analysts expect the company to post double-digit sales growth in the 2013 and 2014 fiscal years. The company is expected to post a net loss in fiscal 2013 and a small profit of $0.32 per share in fiscal 2014. With competition coming and high costs associated with entering new markets, I think that the company's shares are overvalued at this time and recommend selling or staying away from Angie's List. 

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The article Competition Is the Reason to Avoid This Internet Company originally appeared on Fool.com.

Chris Katje has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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