Investors turn on Yelp and Angie's List

Shares of the review sites have seen double-digit drops this year, even though both companies are headed toward profitability.

By Jonathan Berr Aug 23, 2012 3:04PM
African-American woman shopping online © Ariel Skelley/Blend Images/Getty ImagesYelp (YELP) and Angie's List (ANGI), two money-losing review sites, may finally turn a profit next year. Wall Street may, however, not be willing to wait that long.

Yelp's stock price, down 35% from its post-IPO high in April, may plunge further as more shares unlock next week and insiders dump like a Kim Kardashian husband. Shares of Angie's List, which has already seen a lockup expire, have fallen nearly 50% since April, though analysts think the services review site could rebound to $18 in the next year. Its pathway to success is clearer than Yelp, but is by no means assured.

The barriers to entry for the review business are not high. Google (GOOG) acquired Zagat's restaurant guide last year and recently bought travel guide publisher Frommer's to further expand its content offerings. The search engine giant isn't crossing paths with Yelp or Angie's List yet, but it probably will over time. Home Depot (HD) recently acquired Angie's List rival Redbeacon, which is expanding its service. Barry Diller's IAC/InterActiveCorp (IACI) owns Urbanspoon, a Yelp competitor. Facebook (FB) remains a threat as well.

Angie's List and Yelp have ventured into Groupon's (GRPN) territory by offering daily deals. Groupon is struggling to make this business model work and there is no reason to expect Yelp and Angie's List will have an easier time. Though local deals have gotten a bad name on Wall Street, some consumers love them. These businesses will do well if they can figure out how to provide the service profitably.

Yelp and Angie's List have drastically different business models. People don't have to pay a fee to post on the website of Yelp, and most Yelp reviews -- about 45% -- are in the restaurant and shopping categories. Users pay to post on Angie's List, which focuses on what the company calls "high cost of failure" services such as home improvement and health care. Anonymous reviews are common on Yelp but are forbidden on Angie's List.

"We are more than a ratings site and have been since the beginning," says Cheryl Reed, a spokeswoman for Angie's List.

Unlike Yelp, Angie's List is subscription-based and offers advertisers the chance to better target their ads than on Yelp, according to Gordon Borrell of Borrell Associates, which tracks local advertising spending. 

"The people going on Angie's List have money to spend," he said in an interview.

Costs are on the rise for both companies. In the latest quarter, Yelp's sales and marketing expenses were $20.3 million, an increase of more than 65% from a year earlier. Angie's List, a frequent cable-TV advertiser, spent $27.6 million on sales and marketing, an increase of about 50%. These costs are eating into revenue growth of 67% for Yelp and 74% for Angie's List.
 
Either revenue will have to grow significantly or costs will need to shrink dramatically to justify the stock prices of Yelp and Angie's List, a scenario that is unlikely to happen for a long time.

--Jonathan Berr does not own shares of the listed companies.  Follow him on Twitter@jdberr

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