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Traders Who Ignore the Critics Could See 39% Returns by Year-End

If you've ever had a bad experience with a home repair contractor, an auto mechanic or a health care provider, you're probably a strong believer in the saying, "If you want something done right, do it yourself."

It can be hard to find good help. That's where Angie's List (NASDAQ: ANGI) comes in.

Angie's List is a subscription-based website that enables members to obtain reviews and recommendations on local service providers in over 550 categories, ranging from painters to piano tuners to garbage collectors to graphic designers. Currently, more than 2 million subscribers across North America use the service.

The company went public in November 2011. Over this short period, the stock has achieved impressive triple-digit sales growth while rewarding traders with almost 40% returns.

In the most recently reported first quarter, year-over-year revenue grew 68% while the company's subscriber base increased more than 60%. Management anticipates upcoming second-quarter results, scheduled to be released in July, will be equally strong.

Critics of the company -- of which there are many -- claim Angie's List spends too much of its revenue on sales and marketing expenses to ever be profitable. In fairness, the Internet company has yet to achieve sustained positive cash flow. However, increasing membership revenues have and should continue to help the company balance its marketing expenses.

Angie's is also strategically changing the membership renewal structure so that new subscribers will now purchase annual, as opposed to monthly, memberships. According to Chief Marketing Officer Angela Hicks Bowman, this annual model will improve user retention rates and increase the company's cash balance.

Reduced costs to obtain subscribers should also help the company moving forward. In the first quarter of 2013, the company spent $72 to acquire each new subscriber, 12% less than a year earlier.

With an increased subscriber base and reduced operating costs, Angie's List appears poised for continued growth.

From a technical perspective, the stock certainly appears strong.

ANGI Chart

Since early February, shares have formed an accelerated uptrend line, more than doubling to date.

The stock is currently trading just off its all-time high of $26.72, made in late April, presenting a potentially profitable entry point for traders. A small shelf of resistance lies around this high. However, if shares can break $26.72 resistance, they will bullishly complete an ascending triangle pattern.

According to the measuring principle for a triangle, calculated by adding the height of the triangle to the breakout level, the stock could surge to a new high of $37.15 ($26.72-$16.29 = $10.43; $10.43+$26.72 = $37.15).

At current levels, this target represents about 50% returns. But with no historical overhead resistance the stock could potentially move even higher.

The bullish technical outlook is supported by optimistic fundamentals. For the upcoming second quarter, management expects increased paid memberships will push revenue up at least 60% to the range of $58.5 million to $59.5 million, compared to $36.5 million in the year-earlier quarter. For the full 2013 year, analysts project revenue will surge 58.3% to $246.7 million from $155.8 million last year.

Analysts anticipate tighter operating costs, coupled with an increase in paying members, will push second-quarter earnings to -$0.25 per share compared to -$0.41 in the year-earlier quarter. For the full 2013 year, analysts expect earnings will improve to -$0.39 per share from -$0.92 last year.

The company has posted positive earnings surprises in the past three quarters, most notably for the fourth quarter of 2012, when the company pleasantly surprised traders with earnings 300% above projected estimates. If earnings continue to come in well above expectations, shares could quickly rocket higher.

While some may argue the stock is overvalued, Angie's List actually appears to be in line with its peers. In fact, the company's forward price-to-earnings (P/E) ratio of 80 is much lower than competitor Yelp's (NYSE: YELP) 194 and in line with Zillow's (NASDAQ: Z) 77.4. As well, Angie's List price-to-sales (P/S) ratio of 8.2 is lower than Yelp's P/S of 12.4 and Zillow's 15.

Risks to consider: In early May, Citron Research released a scathing report claiming Angie's List's business model is ironically flawed because it relies on "monetizing online reputations" when the website itself is not reputable or impartial. The Citron report was also critical of Angie's List accounting practices, which show revenue growth despite marketing expenses that eat into half the company's profit.

Although, Angie's List has not been able to achieve positive cash flow for a sustainable length of time, moving forward, management anticipates it will be able to scale back on marketing expenses to potentially achieve a cash-flow-positive situation. As such, the company should continue to reward traders with an increasing share price.

Recommended Trade Setup:

-- Buy ANGI on a break above $26.72 resistance
-- Set stop-loss at $20.61, slightly below a nearby shelf of support
-- Set initial price target at $37.15 for a potential 39% gain by late 2013