Angie's List Knocked Down Again

One thing for sure, the stock market is not very forgiving of growth stocks that miss earnings estimates, no matter the amount. In the case of Angie's List , the stock continued a month-long collapse after a third-quarter earnings miss. The company that offers paid members access to reviews of local service professionals generated revenue growth of 56%, yet it wasn't enough to meet analyst estimates.

The company remains under extreme pressure to justify how paid memberships outweigh the free reviews on sites like Yelp . The difference in stock valuations signals that the market thinks the free versions with larger user bases are more valuable. However, investors need to remember that the market tends to overreact and a reversion to the mean could take place in 2014. Remember that Yelp spent most of 2012 in the doghouse trying to convince the stock market that user reviews were a valuable service.

Problems over stated
The biggest concern going into the earnings report was the fear that the company was lowering membership costs due to sluggish membership growth. On the earnings call, founder Angie Hicks did a solid job of explaining that Angie's List regularly tests membership dues. With membership fees declining in relevance, the company is more concerned about the quality of members, rather than the annual fees obtained for joining the service. The primary reason is that service provider revenue not only accounts for nearly 75% of revenue, but it is also growing faster at 66%. Even more encouraging is the 70% growth in e-commerce revenue.

Unfortunately, the company only guided to revenue of $68 million-$69 million for Q4. The amount is below analyst estimates and adds to the fears that lower membership price tests are a sign of desperation. In reality, cohorts that are at least six years old generate over $100 in service provider revenue per member. Clearly, the numbers reflect that a member who pays only $10, yet drives $100 in additional revenue, is preferable to having that customer avoid the service entirely because of the membership fee.

Reversion to the mean
Investors looking at the sky-high prices of Yelp and the recent collapse of Angie's List should probably consider the reversion to the mean theory. These companies don't typically compete head-to-head, suggesting a multiple valuation difference shouldn't exist. Yelp presents a better platform for the casual restaurant or entertainment venue, while Angie's captures the service providers involved in expensive and time-consuming maintenance and repair projects. In essence, consumers will trust random people on a $20 dinner, but they want trusted sources for a $2,000 plumbing repair. Considering these facts, Angie's List and Yelp could theoretically work in tandem, making a reversion back to similar valuation multiples a high possibility.

TripAdvisor goal
Both Angie's List and Yelp hope to earn the title of the top consumer review site. In the case of TripAdvisor , it is the leading provider of consumer reviews for the travel industry. The company is approaching revenue of $1 billion and already has a market cap that exceeds $10 billion. Both Angie's List and Yelp should work in tandem, causing the stocks to revert back to similar valuation multiples.

TripAdvisor had the good fortune of benefiting from the travel industry's quick embrace of Internet-based capabilities by both consumers and service providers. The TripAdvisor numbers shed light on why Yelp currently has a valuation of over $4 billion while still reporting losses.

For Q3 2013, TripAdvisor generated a $65.3 million profit and an incredible free cash flow of $129.3 million, or 51% of revenue. The company generated 20% growth to reach a $255 million revenue base. These are all good signs indicating that Angie's List and Yelp may reach lofty profits in the future.

Bottom line
With the market continuing to punish Angie's List, the stock should be more compelling to investors. Consumer review sites have years of growth ahead before even bumping heads. The membership additions hit a record high during Q3, yet investors are more concerned about slightly missing revenue guidance. Once the market shakes out the stock over the next couple of weeks, it could provide the similar bargain offered with Yelp last November. Remember that Yelp traded around $16 last year when investors were convinced that it was the second coming of the failed Groupon and Zynga IPOs. Angie's List might be down again, but it certainly isn't out for good.

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The article Angie's List Knocked Down Again originally appeared on Fool.com.

Mark Holder has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. 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.

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