Description

ANGI is a digital marketplace for home services, built from HomeAdvisor acquiring Angie’s List in May 2017. Service providers (SPs) pay annual subscription fees to be on the HomeAdvisor network and per match fees for each lead provided. Consumers use the HA site to request home services and receive price indications. ANGI receives a fee for each lead (consumer connection) delivered to an SP regardless of whether that SP is hired for a job. How it works:

ANGI is ~85% owned by IAC and benefits from the shift of finding home service providers via word of mouth (currently ~90%) to online. The company trades ~25x trailing EV/Adj.EBITDA but between 10-13.5x FY22 targets which management’s compensation is heavily reliant upon.

The reason to own ANGI now is because there are signs its fixed price offering is beginning to take hold, which should improve its value proposition to SPs and consumers and further differentiate ANGI from competitors. To understand why fixed price can become a growing moat, it is important to understand the business model.

Business model

In the Marketplace segment, ANGI is an intermediary between consumers and SPs. Consumers use the app to request home improvement service. ANGI curates a handful of qualified SPs in its network, who follow up with the consumer to win the job. This is a lead generation model.

The company recently began offering a fixed price service, where the customer pays upfront for service at a predetermined price and ANGI sends an SP for the job with zero negotiation. The advantage to consumer is less friction, no negotiating. SPs benefit from a guaranteed job. Instead of paying upfront for leads that may or may not translate to business, in fixed price, they accept a reduced fee, but receive guaranteed cash inflow. It is increasingly complex to price projects as value increases, and scale is critical to having enough SPs to fill fixed price offers. This service differentiates ANGI from other lead generators.

As shown, under the fixed price model, the SP earns $800 for the job instead of $1,000, but wins the job with the click of a button. He does not have to pay $90 for three leads (~$30/lead) that result in one job. In this example, the Marketplace SP earns $910 net ($1,000 - $90) for painting the living room but has to give estimates to three people and that requires time and expense. In fixed price, he earns $800 with the click of a button. As ANGI introduces more complex jobs, this advantage becomes more pronounced. 

ANGI’s competitive advantage is scale, which is important to be the leading home service marketplace for several reasons.

1. Depth of service reduces the amount of unfilled requests, which are currently 39%. This provides a suboptimal consumer experience, and ANGI began disclosing this number quarterly in FY20, suggesting heightened focus

2. Spread fixed costs in product development over a larger customer base

3. Spread fixed costs screening SPs (10% of applicants rejected on background check) provides greater cost advantage with size.

Risks

Reliance on Google. Roughly 40% of service requests originated from Google. Ad spend (online, TV, partner payments) is ~37% of revenue and paid search is the largest component. 

In 2Q19, an algorithm change caused more traffic to come from paid search at inflated prices, leading to an earnings disappointment. Management believes it has adapted, but this concentrated source of traffic remains a risk. Over time, as more people use fixed price offerings, pay using the app, and brand awareness expands, ANGI should be less reliant on Google. Until then, ANGI’s reliance on the Google algorithm is a threat. The need to spend so much on advertising is not ideal, but if there are actual network effects, ad spend should scale (as it appeared to be starting in 2018). This will be important to monitor going forward.

Fixed price not a differentiator. The fixed price offering has potential to improve the value proposition to SPs, changing HomeAdvisor from a marketing investment (cash drain) into an upfront cash generator. Still, the offering is new. It may be viewed as an added product option, but not materially improving HA's attractiveness from an SPs perspective. If this happens, the expected ramp in revenue and earnings could be too optimistic. 

Recession. A major contributor to recent strength in ANGI valuation is that business appears to be withstanding the coronavirus. Despite an initial cliff in March, people have resumed investing in their homes, and SPs increasingly joined the network to offset demand softness. If the business proves resilient through a weak economy, it will deserve a premium multiple.

Google/Amazon/Other competitors. There is always a risk of large (or small) tech companies increasing their focus on the service provider space. While they may succeed, building a provider network is tedious. ANGI has 1,500+ sales reps throughout the US growing the network market by market. Amazon launched its Home Services offering in March 2015 and Google began offering a home services product in 2017. Neither appears to be a focus. Given the complexity of building an SP network, it seems doubtful that anyone can succeed in this business as a side project.

90%/10% offline/online mix never shifts. ANGI has been talking about the shift of 90% of SPs found via word of mouth or other offline shifting to online since its inception. The mix has not materially moved. Perhaps it never will, as something about finding home service pros is better achieved offline. ANGI has grown well above GDP, but the long-term addressable market would materially increase if more people begin to search for SPs online. Management expects more digital natives becoming homeowners to tip the shift, but it is unclear if this will ever become a tailwind. 

Valuation

ANGI’s valuation comes down to whether it is a marketplace with network effect characteristics or not. If it’s a growing network, financial improvement should accelerate. If ANGI is just an online bulletin board for SPs, EBITDA is not likely to ramp in the coming years, and current ~25x LTM EV/Adj.EBITDA and 3.5% FCF yield is fully valued. With fixed price becoming the basis of a product that will differentiate ANGI, plus the continued benefits of the largest pool of consumers and SPs, unit economics and financial strength should improve over time, and management comp is directly tied to this. In Mar20, CEO was granted 1.1m PSUs (other exec grants ranged 147k-738k PSUs) for achieving share price of at least $9.01, and NA revenue and Adj. EBITDA as follows. 

If revenue and EBITDA grow 20%+ CAGR as targeted through FY22, a low double digit multiple at that time will likely appear very cheap. Assuming the midpoint of the range of $365-490m FY22 Adj. EBITDA, current valuation implies an 11.5x multiple. If ANGI maintains its current 25x at the midpoint of EBITDA targets, implied share price is $21. The ranges vary widely so make your own assumptions, but there should be plenty of upside if the FY22 targets are achieved.

Catalyst

Fixed price product traction

Improving SP growth