Angie's List gets little love from analysts

The stock's IPO quiet period ends, and weak recommendations follow.

By InvestorPlace Jan 3, 2012 5:31PM
Image: Young man and woman holding power tools, low section (© Thomas Barwick/Photodisc/Getty Images)By Tom Taulli

When it comes to IPOs, there are several arcane rules. One is the "quiet period," which bans a company's insiders and underwriters from making any forward-looking comments about the offering.

But once the quiet period expires 40 days from the IPO, you'll typically see plenty of analyst recommendations. While they usually glow, there are some exceptions. Just look at Groupon (GRPN). In mid-December, when Groupon's quiet period expired, the company's analysts issued recommendations that ranged from "neutral" to "sector perform" to "hold."

This should have been a red flag for investors. Let's face it: Wall Street analysts don't like to cause too much rancor with big companies because it could mean losing future investment banking fees, such as for secondary offerings and acquisitions. In the case of Groupon, its stock fell 13% after the recommendations.

This week, we got another case: Angie's List (ANGI). On Tuesday, the quiet period expired and the analyst recommendations were lukewarm. For example, Bank of America (BAC) gave Angie's List a "neutral" rating and RBC Capital placed a "sector perform" rating on the company. ANGI received only two "buy" ratings.

Price targets were in a range of $17 to $19; ANGI closed the day down 6.3% to $15.09.

Angie's List is a well-known destination for people to find contractors, and boasts more than 1 million members. Unlike other providers, Angie's List actually has been able to get its customers to pay ongoing fees. And the company's growth rate has been strong, with revenue up 46% to $62.6 million for the first nine months of 2011.

But there's a hitch: To achieve this growth, Angie's List has been spending aggressively on marketing (there's a good chance you've seen the company's ubiquitous commercials). Last year's marketing expenditures came to $48 million, up from $30.2 million in the same period a year ago.

That's because Angie's List must compete against free offerings, including ServiceMagic, Yelp, Insider Pages and Kudzu. It also has pressure from Internet giants like Google (GOOG), Groupon, Microsoft (MSFT) and Yahoo (YHOO). (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Right now, analysts might think Angie's List is just too expensive. ANGI's valuation is fairly hefty, coming to about 9.5 times revenue -- a steep price to pay for a company that faces lots of competition and relies on heavy marketing expenditures to fuel growth.

Tom Taulli runs the InvestorPlace blog "IPOPlaybook," a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of "All About Short Selling" and "All About Commodities." As of this writing, he did not own a position in any of the aforementioned stocks.

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