Description

Background

ANGI operates leading home services marketplaces in the US and several international countries, with major brands including Angie’s List, HomeAdvisor, and Handy.  In the US, according to the company, 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: (1) advertising model on top of an online directory of home services providers with customer reviews, (2) marketplace model which matches customers to local service providers, with a fee for introductions, (3) 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, pushing home services procurement online (and mobile app-based). 

Thesis

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.  (1) Following 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.  (2) The company announced the consolidation of brands under one unified Angi, enabling 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.  This is a declining percentage of revenue and in Q1’21 represented 18% of total reported revenue. 

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 commenced business model shift 1.0 from online directory to online marketplace, 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: (1) aggregated fragmented, hyperlocal supply – a key chokepoint; (2) theoretically raised the minimum quality bar (even if only slightly) via reviews and company vetting.  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.  Over 60% of requests are non-discretionary, supporting high potential resiliency of demand.      

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.  Business model shift 2.0: reduce friction. 

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. 

Two key aspects to achieve this are related to scale of information:

1. Ability to determine the key inputs to accurately scope a project

2. Understanding of local economies (i.e., individual project cost in Des Moines vs. San Francisco) to set the clearing price that meets consumer demand without ANGI losing money on the spread

Get these right and you have a defensible moat. 

Scale also provides fixed cost leverage, increasing the capacity to market and invest in product development relative to smaller player.  Scale is required, and ANGI has first mover advantage, with 32M service requests from 20M households and a network of 250k service professionals.   

Fixed price positively impacts both sides of the marketplace.  For consumers, a better experience increases retention; customers who actually buy a service repeat at rates multiples higher than those who just enter a service request – an average consumer submits 1.8 annual service requests whereas a customer who has completed a booking submits 3.3.  (2) As they expand the model to more regions, they are observing an increase in transacting SPs and a step-up in engagement and revenue potential of those SPs.  Fixed price now offers over 200 projects (of 500+ offered on the marketplace) and delivered $55M (+66% Y/Y), or $250M+ run-rate, in gross revenue last quarter (14% of total reported revenue) with no incremental marketing spend.  It is early, but progress is there. 

 Ancillary to fixed price, several elements key to successfully delivering sustainable 20%+ revenue growth are in place: mobile app, partnerships, subscriptions, and payments. 

• App-based:  Key enabler for the demographic likely to take to the fixed cost model.  80-90% of SPs use the app to manage jobs; ANGI has successfully migrated supply to the app.  This improves response times, communication, and geofencing. And, SPs are now digital, meaning they can meet the consumer where the consumer wants to be, accelerating online penetration.  

• Partnerships: ANGI partnered with Lowes offering Lowes pro customers an ANGI SP membership.  The ability to combine a services-led offering with a product-led offering for the same supplier and end customer base provides clear synergies.  Partnerships like this can positively contribute to supply growth. 

• Subscriptions: ANGI’s SP business has offered subscriptions for some time, but recently, the company rolled out a consumer facing membership with a 20% discount on eligible fixed price services for an annual $20 fee.  This improves retention and customer loyalty. 

• Payments: SPs now accept payment through the ANGI app for both ANGI and non-ANGI customers, increasing consumer app downloads and SP retention.  Payment volume was $100M run rate in Q1’21.

All of the above improves traffic, frequency, and retention.  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.

ANGI will not have the strongest network effects of any marketplace.  For certain service categories, it will remain a lead gen tool.  If you find a great house cleaner, you keep them and negotiate lower rates off ANGI.  The company realizes this.  Two facts remain: (1) there is significant churn and new business formation at the SMB level, so a scaled lead gen tool has value; (2) there are many services which are lower frequency where provider loyalty is less likely to exist, making the fixed cost matching model an optimal solution.  For example, fix my shower drain or pressure wash my house. 

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.

ANGI also seems intent on continuing to offer the directory model and traditional marketplace model for projects where those models make more sense, as management aspires to have fixed price as 50% of revenue mix over 5-7+ years. 

Why now

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.  In fixed price, ANGI will invest $60M to build market liquidity in new geographies.  In brand, the company anticipates a $40M impact to profits from navigating through the change of domains while leaving behind the legacy of traffic and link authority valued by search engines, creating profit headwinds into 2022.  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, scheduled to happen this calendar quarter (Q2’21).  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.

Valuation

The margin reset along with recent market forces created a compelling entry point for the stock.

At the time of this writing, ANGI trades at $12.06 per share, implying EV/’20 gross profit of 4.7x which is 4.2x ‘21E and 3.6x ‘22E (gross profit is appropriate given the current investment cycle depresses EBITDA in the short-term).  ANGI’s EV/GP is well below marketplace peers.  Because EBITDA margin maturation has been pushed out by several quarters due to investment in the business, valuing the business on ‘25 is appropriate.  

Applying a 17x forward EV/EBITDA multiple to 2025E EBITDA of $646M (30% ‘20-25 CAGR) implies 2024 EOY EV of $10.9B, or 4.1x EV/2025E Gross Profit (16% ’20-’25 CAGR), roughly in-line with current EV/GP.  17x EBITDA for a business growing EBITDA at a 30% CAGR on teens gross profit growth is reasonable and in-line with pre-Covid ANGI multiples, but on a more attractive asset.  ‘25 target EV discounted back at a 10% discount rate implies a ‘21 EOY price target of $16.21 per share, 34% above current levels, and implies 4.8x EV/GP, still a discount to comps but a warranted near-term narrowing of the valuation gap as ANGI’s growth re-accelerates. 

Projections (table below) assume a 14% gross profit CAGR ‘20-27, which is an accurate depiction of top-line growth given the gross vs. net nature of the fixed price model, and 18% ‘27 EBITDA margins on reported revenue, or 30% on adjusted net revenue (which uses the take rate from the fixed price segment as opposed to gross revenue).  EBITDA margin targets are below management’s previous LT guide of 35%, which assumed S&M 35-45% of revenue and G&A + product development 10-20%.  30% EBITDA margins on adj. revenue implies S&M is 47% adj. revenue (28% of reported) and G&A + product development 21% of adj. revenue (13% of reported).  In other words, this target margin profile is reasonable. 

A DCF-derived target may be more appropriate given the projected long-term profile of the business and current maturation stage.  DCF yields a $19 EOY 2021 target assuming the below.    

From management, for reference – indicative of monetization upside relative to GTV and market size:

Catalyst

• 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 will increase IAC's focus on ANGI