NEW YORK (TheStreet) -- There's incredible value within Angie's List (ANGI) - Get ANGI Homeservices Inc Class A Report -- but something is wrong with it. Consider the relative performance of Angie's List in the market. At its IPO, Angie's List closed at $15.80 on Nov. 18, 2011. But Angie's List traded at $6.37 as of Tuesday's close, a decline in shareholder value of 59.7% over just three years.
So why is Angie's List for sale? There are three big reasons.
Its consumer pricing strategy;
Its lack of quality data;
Its inefficient allocation of capital.
This becomes clear when we look at Angie's List's closest peer, Yelp (YELP) - Get Yelp Inc Report , which has created significant shareholder value. At its IPO, Yelp closed at $24.58 on March 2, 2012. Now, it is trading at $67.23 a share as of Wednesday at 9:40 a.m. This represents an ROI greater than 173%, which epitomizes the creation of shareholder value.
So why is there such a significant difference in shareholder value between Yelp and Angie's List?
Both Angie's List and Yelp should basically operate from the same business model. Both provide consumption advice on service providers through consumer reviews. Yelp serves the entertainment segments (restaurants and bars), whereas Angie's List serves the repair and maintenance market for the home and health care segments. Yet Yelp has performed much better.
Yelp out-competes on pricing (it's free to use for consumers) and data quality (there's much more data available).
Angie's List has a major capital allocation problem. Why did the CEO realize cash compensation of more than $23 million since the IPO, even though the business strategy of Angie's List destroyed around$300 million of market capitalization? It's a poor use of capital.
And the Angie's List pricing strategy is possibly the worst part.
The tiered consumer pricing strategy of Angie's List is flawed, misaligned and self-defeating. It values the membership fee more than the membership itself.
Angie's List's objective is to penetrate 100% of the target market. The greater the penetration, the greater the leverage with the service provider, especially for advertising. Another objective is to serve the membership, which builds the membership, which creates the value for the service provider, which generates the ROI for the Angie's List shareholder.
Unless Angie's List modifies its consumer pricing strategy, HomeAdvisor and Healthgrades will replace Angie's List in the market -- because both of these competitors value the membership itself, not the membership fee. By building their membership base, these companies will be able to extract greater value because they'll be able to offer a larger market to the service provider.
Both HomeAdvisor and Healthgrades could become very valuable to Angie's List in a rollup strategy. From these competitors, Angie's List could acquire expertise, strengthen weaknesses, eliminate redundancy, create efficiency and generate a healthy return for the shareholder. It's a fairly straightforward recapitalization strategy.
The Angie's List consumer pricing strategy requires an inefficient allocation of capital. According to its five-year average, Angie's List recognizes 92% of its revenue as a sales and marketing expense. That's a waste.
Angie's List needs to reposition itself as the empathetic facilitator of satisfied transactions for both the home and health care segments of the market. Angie's List still has the cachet in the market. It's a great message to the market.
Perhaps the reported buyout in the works will finally fix Angie's List.
For a more detailed analysis on Angie's List, please visit the Capital Executive Web site.
At the time of publication, the author was long ANGI.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates YELP INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate YELP INC (YELP) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The area that we feel has been the company's primary weakness has been its relatively poor performance when compared with the S&P 500 during the past year."
You can view the full analysis from the report here: YELP Ratings Report