Angi Risk/Reward is Worth It
Analyst: Young Money Capital
Angi’s (ANGI) business model is a fixed pricing model for the home service industry. They pair service pros with homeowners on their network. Then, Angi takes a percentage of the sale for connecting homeowners with service pro. Angi services totaled 358 million in revenue for 2021 and were up 120%. It is unclear how much of the growth is organic or from their roofing acquisition for the past year, but about half of the Q3 YoY growth was organic. 27% of Angi’s 4th quarter revenue came from the fixed price offer. In 2020, Angi had set prices for 500 common home repair jobs in 400 locations.
The rest of Angi’s revenue came from their legacy offering. Interactive Corporation (IAC), which acquired Angi in 2017 (formerly known as Angie's list), pivoted from Angi’s legacy business which was an online marketplace that matches service pros with homeowners. Historically, if a homeowner needed to paint a wall, they solicited bids from service pros. Angi provided service pros a hub to connect with homeowners. Service pros would pay Angi for this service. There was a lot of friction in this exchange and Angie’s List platform never took off. Angi’s fixed price model reduces the friction in the online home services business. IAC still has 85% of Angi's economic interest and 98% of Angi’s voting rights.
Angi has less than a 5% market share of the entire home improvement industry, but they are leading the online industry in revenue, service requests, and they are the only national platform to offer a fixed pricing model. CEO Oisen Hanrahan estimated ”There's probably a dozen categories or so that we could build billion-dollar-plus revenue businesses just within that category alone. The TAM is enormous.”
It should be no surprise that “73% of service pros surveyed said they would take a pre-priced job offered by ANGI, with 21% unsure.” Service Pros primarily get jobs by word of mouth. “27% of service pro time is spent on non-revenue generating work (marketing, negotiation, back-office), and on 19% of jobs, customers cancel last minute.” Wasted time is lost money.
In the online home improvement marketplace, scale is the most important factor. Scale benefits the users by creating cross-platform network effects. Scale benefits the service pros by providing them with more job opportunities, and homeowners with faster response times. Additionally, service pros can travel less and concentrate on their specialties.
Scale gives Angi an advantage for pricing the jobs as well. “The dataset of pricing [home service jobs] nationally doesn’t currently exist… We have the opportunity to become the reference point for home services pricing." – Brandon Ridenour, Former CEO of ANGI.
As Angi collects more data, they can price jobs more accurately. This is an extremely complex undertaking.
From a math standpoint, we serve all of America, we serve every single zip code and there’s well more than 500 different types of projects that we do. They’re about 42,000 zip codes in America. If you combine the zip codes and the 500 plus services, you almost have what you can think of as 20 million micro markets. - Brandon Ridenour, Former CEO of ANGI
By contrast, in 2020, Angi has priced 500 tasks in 400 different geographies or ~200,000 different offerings. Angi is trying to localize its offering and use its data advantage to more accurately price projects. Angi’s CEO mentioned the goal of 500 tasks across 42,000 zip code locations or ~21,000,000 different offerings. The complexity and data required for this undertaking create the moat. As Angi continues to roll out its offering it is completer and more precise. Google is not a major threat to Angi given their less precise offering and their focus is on search, not on home improvement.
The next biggest online home improvement platform is Thumbtack. whose business model is similar to failed Angie’s List. Thumbtack’s scale compared to Angi’s scale is small. Another threat to their business is that they do not provide sufficient background checks for service pros. Angi does.
Angi’s customers and service pros are loving the fixed price offering. Angi’s app has 4.4 stars and Angi has seen an increased conversion rate for requests for the fixed price offering driving revenue and contribution margin.
Benefits of Angi App
Service Pros Love Angi's App
“It would be great to not have to haggle and just focus on the work”
“Filling in empty time slots is a big benefit.”
“A steady stream of work that I don't have to hunt for would be huge”
Source: Columbia Value Investing
Angi also has a partnership with Walmart (WMT).
“When Walmart customers shop in-store or online, they’ll be able to also book an Angi professional for any of 150 common home projects, including flooring, painting, fence installation as well as smaller jobs like furniture assembly or mounting a big-screen TV.”
This strategic partnership increases Angi’s scale, thus, increasing their moat.
IAC owns an 85% economic interest and 98% voting interest in Angi aligning their incentives with shareholders. IAC management has expressed confidence in Angi’s business, “If other shareholders lose patience during this phase for Angi, we at IAC are happy to own more through continued share repurchases at Angi.”
This year, Angi is slightly free cash flow negative, but they do have a large cash position. They have used their cash for acquisitions, paying down debt, and share repurchases, “Between August 4, 2021 and November 3, 2021, Angi Inc. repurchased 2.1 million Class A common shares at an average price of $10.67. Angi Inc. has 16.1 million shares remaining in its stock repurchase authorization.” 3% of the float remains in the buyback which is a significant vote of confidence from management for a company that is not producing free cash flow.
Angi is a high-risk, high-reward company. Accurately predicting how much jobs should cost and creating a network of service pros and homeowners is an extreme undertaking. Angi shareholders need to closely track their fixed pricing revenue growth and any slowdown would be alarming as they had last quarter. Angi's management seemed to have a reasonable explanation, "we saw a pretty significant uptick in Omicron call offs, customer call offs, pro call offs, we saw an 8x increase in January versus a normalized number for the year.” They also mentioned easier comparables in the next couple of months which should give investors hope.
A valuation section for Angi would be useless given the wide range of outcomes possible. If the transformation is successful, the upside could be 5-10X. If Angi fails, the shares could be worthless.
Angi is the industry leader in the online home improvement category. They have less than 5% market share in this massive industry giving them a long runway for growth. They have multiple competitive advantages in terms of scale, data, and focus on the fixed pricing model that Google and Thumbtack cannot compete with. Angi has strong brand loyalty and customers are showing higher conversion rates with the fixed price offering. Angi is backed by IAC, which has a history of turning around failing internet companies. Angi’s undertaking is extremely difficult and comes with a lot of risks, but the potential rewards make it worthwhile for those who can stomach the risk.
Disclosure: I/we have a beneficial long position in the shares of ANGI, GOOG either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.