| 2016 | 2017 | ||||||
| Price: | 47.83 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 83 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 3,969 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | -865 | EBIT | 0 | 0 | |||
| TEV (in $M): | 3,100 | TEV/EBIT | 0 | 0 | |||
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Overview:
IAC is an Internet conglomerate with a diverse range of online media properties.
“IAC is a leading media and internet company comprised of some of the world’s most recognized brands and products, such as HomeAdvisor, Vimeo, About.com, Dictionary.com, The Daily Beast, Investopedia and Match Group’s online dating portfolio, which includes Match, OkCupid and Tinder.
IAC’s family of websites is one of the largest in the world, with over two billion monthly visits reaching users in more than 190 countries. The company is headquartered in the Chelsea neighborhood of New York City and has business operations and satellite offices around the world.”
Throughout its 20+ year history, IAC has amassed a tremendously successful track record acquiring and developing valuable Internet and media assets. At the heart of its success is founder and current chairman, Barry Diller.
Diller has generated value through a mix of M&A, investing in organic growth, buybacks and spinoffs – which include names like Expedia, TripAdvisor, Ticketmaster, The Home Shopping Network, Tree.com and many others.
For background, I’ve included a link from Dealbook that summarizes the evolution of IAC’s business model, as well as Diller’s overall record -- http://www.nytimes.com/2015/11/24/business/dealbook/barry-dillers-business-model-bears-fruit.html?_r=0
IAC operates under five reporting segments: the Match Group, HomeAdvisor, Video, Publishing and Applications
Thesis:
IAC’s is undervalued. The stock is currently trading at a wide discount to a conservative sum-of-the-parts (SOTP) valuation of its diverse collection of assets, with significant upside optionality embedded in the explosive growth potential across its holdings.
IAC owns 84% of publicly traded Match Inc. In the next 12 months, the market should re-rate the shares of IAC’s recently IPO’d MTCH as it slowly matures as an independent company and investors grow to appreciate the quality and growth potential of its diverse dating properties.
IAC’s mature segments are highly free cash flow generative, defensible, and asset-lite, while several growth businesses operate near or below break-even profitability. Improving transparency into some of these relatively early-stage ventures, some of which are burning cash but provide significant optionality, should start to highlight their attractive business models and strong growth profiles.
In addition to misunderstood and ignored value within its numerous reporting subsidiaries, there are other sources of hidden value that are completely overlooked by the investor community -- including investments held at cost of VC funds run by Highline Ventures, co-founded and run by former employee, now super-star angel/ venture capitalist, Shana Fischer – which holds seed investments in various internet startups, including Pinterest, Refinery29, Stripe and others, that have raised capital at multi-billion dollar valuations in recent rounds. It is hard to estimate what these are worth, but it is safe to say they are surely worth multiples of what they are carried for on IAC’s balance sheet.
Core-dating assets
The core Match dating assets, ex-Tinder, are extremely attractive businesses and represent a significant chunk of IAC’s value. In the last 5 years these holdings have more than doubled revenues while maintaining relatively healthy ~30% margins despite hyper-aggressive growth spend. Steady state EBITDA margins in these businesses should approximate 45 to 50% over time.
Match owns 45 online dating brands serving both general and niche demos. With the recent acquisition of Plenty of Fish, Match now owns four of the top five dominant global brands: Match.com, OkCupid, Tinder, and PoF; leaving eHarmony as its only meaningful competitor.
Scale is a significant competitive advantage for Match. Its size and network effects translate into pricing power, creating significant operating leverage on its cost structure and growth spend (lowering CACs), along with significant cross-selling opportunities by monetizing users multiple times across its various platforms.
While each property offers a slightly distinct service and business model, these are generally capital light businesses with good margins that tend to expand with moderate amount of growth as a result of attractive incremental margins and growth economics.
Considering that the online dating business is benefiting from numerous secular dynamics, including an expanding singles demographic in the U.S. and increased Internet usage globally -- trends that will persist and continue to support steady user and subscriber growth -- these properties are very valuable.
Historically, Match has created significant value by growing organically and through extremely accretive M&A. This has been achieved by paying reasonable multiples for targets, optimizing monetization, reducing churn and growing subs through better execution and cross selling within its broader ecosystem.
By most measures these dating platforms have been stable growing businesses, however, their performance is even more remarkable when we consider that profitability has been significantly masked due to cash burn in other early stage investments within IAC and, more recently, due to one-time investments to integrate back-end systems and operations across acquired platforms.
Backing out some of these one time expenses, many of which will have attractive returns associated with them in future periods, true earnings power is conservatively 15 to 20% higher than reported numbers.
Improving monetization performance from recent acquisitions, as well as efficiency improvements in the now consolidated platforms will drive meaningful EBITDA improvement in the core dating business in upcoming quarters.
I expect the recent PoF acquisition to be fully integrated and accretive to EBITDA in upcoming quarters, as it will likely follow a similar trajectory to OkCupid in its monetization strategy.
Concerns over cannibalization on the core properties by Tinder should also dissipate as analysts and investors worry less about trends in headline average revenue per paying user (ARPPU) figures, and begin to appreciate the broader growth trends within each property. It is worth noting that most of the ARRPU decline can be attributed to a mix shift due to a larger base of average paying customers as Tinder starts adding paying subs at an accelerating rate – during the last quarter there was PMC growth of 1.06 MM y/y to 4.61 MM.
It is also important to note that Match’s long-term strategy is to maximize customer lifetime value (CLV) through cross-promotion of its various platform offerings.
It is very early days as Tinder tweaks its paid features, advertising and overall user monetization strategy and cross selling approach. In the short term, Tinder will lead to an accelerating growth of overall paid subs with lower ARPPU’s, but over time the steady rise in paid subs combined with higher pricing for its other lower ARPPU brands, coupled with growth in its higher-priced premium brands, will translate to more users and more revenue across the whole business.
The 2015 10k explains some important changes and dynamics that I think provide needed context to understand recent results:
Strong mobile adoption. We have recently experienced strong growth in the usage of our products on mobile devices. Mobile adoption leads to higher user engagement and also opens new customer acquisition channels. As a result, mobile adoption has represented, and continues to represent, a significant growth opportunity for us. However, it also requires dedication of additional product and technology resources and often requires the payment of additional fees to app stores. Additionally, our mobile products, taken as a whole, have tended to have lower conversion rates than our desktop products, when we control for other factors impacting conversion. This has led to challenges over the last few years for those of our brands that had significant pre-existing desktop businesses with high percentages of paid members. Unlike a mobile only brand like Tinder, where each new mobile user is incremental to the total number of users, for those brands with significant desktop usage, many new mobile users are users who previously would have been likely to sign up for those products using the desktop. As a result, as the mobile migration has been rapidly underway, we have seen our overall conversion rates challenged in those businesses. However, we expect to see this trend reverse itself for two reasons. First, the migration to mobile will either slow rapidly or end as mobile devices obtain a more stable level of penetration within the population. Second, we expect to be able to make significant product improvements to our mobile products over the coming years, driving meaningful conversion increases. Our mobile products are relatively early in their development stages, as we only began to devote meaningful resources to optimizing these products in the last few years; in contrast, we have focused on optimizing our desktop products for increased conversion for many years. Therefore, based on our prior experience with product improvement, and the finite nature of the mobile migration, we believe the conversion challenges we have been facing as a result of the rapid mobile migration in these businesses will level off and then reverse.
Lower cost users. All of our brands rely on word-of-mouth, or free, customer acquisition to varying degrees. Word-of-mouth acquisition is typically a function of scale (with larger communities driving greater numbers of referrals), youthfulness (with the viral effect being more pronounced in younger populations due, in part, to a significantly higher concentration of single people in any given social circle) and monetization rate (with people generally more likely to talk openly about using dating products that are less heavily monetized). Additionally, some, but not all, of our brands spend meaningfully on paid marketing. Accordingly, the average amount we spend to acquire a user differs significantly across brands based in large part on each brand’s mix of paid and free acquisition channels. As our mix has shifted toward younger users, our mix of acquisition channels has shifted toward free channels; driving a significant decline over the past several years in the average amount we spend to acquire a new user across our portfolio. Our costs of acquiring paid members have also declined meaningfully. We expect the dynamics that have led to the growth in word-of-mouth customer acquisition to continue going forward and for our brands to continue to acquire significant numbers of users through low-cost means.
Mix-driven decline in consolidated ARPPU. Tinder, OkCupid, PlentyOfFish and Twoo all have a lower ARPPU, than our other brands. As the number of paid members from the lower ARPPU brands has become an increasingly large percentage of our aggregate number of paid members, our overall or consolidated ARPPU has declined. However, within many of our significant brands individually, ARPPU is increasing. Additionally, the decline in ARPPU has coincided with the decline in the cost of acquiring new users discussed above. Although brand mix shift is reducing consolidated ARPPU, we see continued ability to increase price at many of our brands.
Changing paid acquisition dynamics. Even as our acquisition of lower cost users increases, paid acquisition of users remains an important driver of our business. The channels through which we market our brands are always evolving, but we are currently in a period of rapid change as TV and video consumption patterns evolve and Internet consumption shifts from desktop to mobile devices. However, advertising opportunities have not kept up with audience migration, putting pressure on our paid marketing activities. Recently, we have been able to increase our marketing spend despite these trends, and to bring down the costs of acquiring new users to our products through our paid channels. However, our increases in spend have generally been made in less effective channels, bringing in lower converting users. We believe that advertising opportunities will increasingly follow consumer usage patterns, and that as this occurs, and as we improve our expertise at exploiting these evolving marketing channels, we will be able to increase our marketing efficiency over time.
My pro-forma 2016 EBITDA for the core-dating business ex-Tinder, backing out some of the cash-burn from other investments, along with the PoF acquisition is ~$420 MM. I believe a 12x multiple is conservative considering there is still significant low-hanging fruit to achieve margin expansion, on the revenue and costs side, along with further growth through consolidation. The core dating sites, ex-Tinder, thus are worth ~$5.1 billion.
Tinder
Tinder was launched in 2012, and immediately went viral and has since risen to scale and popularity faster than any other product in the dating category growing its MAU base well in excess of 100% y/y in recent years.
Tinder's mobile-only offering and well-know "right swipe" and location-based features have led to significant adoption among the millennial generation, previously underserved by the dating category.
Tinder now boasts ~30 mm MAU, 100 mm+ downloads, generates 1.4 bn swipes per day, 26 mm matches per day, 10 bn+ total matches in 196 countries. User engagement per daily active user is ~35 minutes a day.
Tinder is currently in the very early stages of monetizing its massive traffic through a mix of subscription and advertising revenues. Subscriptions penetration is its infancy, ~3% of users, and that is expected to grow closer to 10% as the number of subscription options with different features and pricing is tweaked. Advertising loads are also expected to increase and CPMs to rise for non-subscribers.
Tinder is expected to bring in ~$100 MM in EBITDA in 2016. In the next 18 – 24 months, I estimate monthly active users to grow somewhere in the 40 to 50 MM range, with a blended monetization of $0.25 to $0.75 in monthly ARPU. The midpoint of 45 MM monthly users at a $0.50 implies ~$270 in revenue – at ~50% EBITDA margins, and a 12x forward multiple Tinder alone is worth ~$1.6 billion today.
As Tinder continues to mature as a business, these numbers will grow considerably as subscribers are offered a broader set of enhanced features and rich user data is sold more effectively to advertisers at higher rates.
In the next 3 years, using conservative growth estimates in MAU to around 55MM and subscription penetration of ~8% -- a comparable level of what Match has achieved with other properties -- subscription revenue alone could reach $450 MM. With that user-base, a 4% ad-load and $6 CPM (both conservative assumptions relative to other online businesses), it will generate an additional $225 MM revenue stream. This implies a potential 4 to 5 billion-dollar value for Tinder in the not too distant future.
HomeAdvisor
HomeAdvisor is a leading nationwide home services digital marketplace that helps connect consumers with home professionals – essentially a network of local handymen, painters, plumbers, architects, engineers, etc…
HomeAdvisor's domestic network currently consists of approximately 102,000 paying service professionals in the United States providing services in more than 500 categories ranging from simple home repairs to larger home remodeling projects.
With a critical mass of providers and customer reviews, HomeAdvisor is a leader in the online home improvement market, having generated 9.8 million domestic service requests from homeowners during 2015. Its matching, on-demand and directory services create an invaluable ecosystem for providers who typically see an immediate ROI on their subscriptions. Similarly, the convenience, transparency and educational tools available for users create an enjoyable and cost-effective experience that makes home improvement projects more efficient. The end result is a business with very strong network effects in with an expanding $10 billion+ TAM.
As with other properties, IAC is focusing on growing the HomeAdvisor business by investing heavily in TV advertising, enhancing the user experience through product improvements, and by investing in the quality of its provider network.
Revenue growth of 40%+ has accelerated for eight straight quarters, but profitability, while growing, is significantly depressed due to its aggressive marketing budget – which is arguably multiples above where it would be in a more mature, steady state.
2016 revenue will be >$400 MM. Management believes this ultimately is a 25% EBITDA margin business. Considering its growth trajectory and attractive business model, HomeAdvisor is worth at least $1.2 billion dollars today.
Search & applications
The search business is made up of toolbars and desktop software that serve the b2b channel, also known as “partnerships”, as well as the direct to consumer business which consists of various utility applications that typically run on web-browsers and are distributed to users free of charge.
These products essentially monetize search query / traffic in exchange for certain functionality or content.
In recent years, the search and applications business has struggled as Google has implemented changes to its service agreement with stricter opt-in policies for IAC’s partners to install toolbars on 3rd party browsers without their explicit understanding and permission.
These are arguably the lowest quality assets owned by IAC. The direct business has been impacted less than the b2b business and has shown stability in terms of revenue and margins, however, due to the uncertainty around these products / businesses I assign a low 4x multiple to its 130 MM forward EBITDA, and thus value this business at ~$520 MM.
Publishing business
The publishing segment is primarily composed frequently visited websites that deliver niche content. Sites like about.com, Investopedia.com, dictionary.com, and others, produce content and sell advertising and are generally stable and predictable assets that collectively generate >$100 MM in EBITDA.
These tend to grow along with global Internet penetration and thus have healthy secular growth prospects. I estimate fair value for these assets to be ~$800 MM.
Video segment
The video segment is lead by a video platform called Vimeo that has over 160 mm monthly users and 35 MM registered users.
In contrast to YouTube, Vimeo is ad-free, offers high quality HD video and is focused primarily on niche content – i.e. documentaries, independent films and shorts. The company was founded by a group of filmmakers and has attracted a loyal following of creative artists and film professionals looking for alternative ways to share and market their work.
To get a clearer sense of how the experience and content of Vimeo differs from YouTube, it is helpful to watch each platform’s most viewed videos of all time;
Vimeo: https://vimeo.com/channels/top/22439234
YouTube: https://youtu.be/_OBlgSz8sSM
Vimeo offers three membership options for registered users who want to upload content or use its video tools: Basic (free), Plus ($59.95/yr), and Pro ($199/yr) – each with different levels of storage and support. Here is a detailed description of the different membership offerings -- https://vimeo.com/upgrade
Users like Vimeo because of its clean layout, its simplicity, and because it offers a range of powerful tools and technical support options.
Currently, there are 700k paid subscribers, which are the main source of revenue. However, by choosing to forego advertising the platform hasn’t really been monetized anywhere close to its potential. This has been done purposely as the business is still very much in growth mode, focusing on expanding its user base by prioritizing and enhancing the user experience.
Their VOD service has been gaining popularity and has proven to be a viable distribution option for filmmakers. This is a very attractive option for content creators and viewers alike. Just today, Vimeo announced the acquisition of VHX – http://techcrunch.com/2016/05/02/vimeo-acquires-vhx-to-boost-its-video-on-demand-business/. This acquisition reflects the success Vimeo is having in its premium over-the-top business, and its intention to grow this revenue stream.
Vimeo is growing its top-line at 25% per year and has only scratched the surface in terms of its potential. Given its strong growth potential, dominance within its niche and potential value to a strategic, Vimeo is conservatively worth 7x its $90 MM in revenue, or around $630 MM.
I estimate that IAC’s other media properties within the video segment, including DailyBurn, Electus, IAC films, CollegeHumor and Notional, are worth around $200 MM or 1.5x trailing revenue.
Adding it all up
In general, I believe IAC’s strategy to acquire, incubate and invest in product-focused businesses with large addressable markets, has proven successful time and again. IAC is home to a rare mix of dealmakers and entrepreneurial executives / operators that take equal pride in acquiring an asset at the right price, and growing it by injecting high ROI spend, that may depresses earnings in the short term, but go on to generate dramatic IRRs in the long run.
Presently, spending across a number of newer properties is masking the quality and margins of some of the more mature businesses, but in most cases management is following a reasonable path to compound value.
While I generally eschew SOTP valuations – IAC can’t really be valued any other way. The table below is my base case valuation of the parts, with a detailed explanation of each in the body of this writeup.
|
SOTP |
|||
|
84% of Match |
$4,700 |
||
|
HomeAdvisor |
$1,200 |
||
|
Vimeo |
$630 |
||
|
Video Other |
$200 |
||
|
Publishing |
$800 |
||
|
Search |
$500 |
||
|
VC Investments |
$500 |
||
|
Net Cash |
$865 |
||
|
Corporate |
-$700 |
||
|
Equity Value |
$8,695 |
||
|
FDS |
91 |
||
|
$ / Share |
95.55 |
||
It is easy to see that most of IAC’s value currently resides in the Match assets. I value MTCH presently at a $6.7 billion dollar EV. After subtracting net debt, I estimate IAC’s stake is worth ~$4.7 billion. However, as noted above, the upside for Tinder is tremendous and could be worth multiples of my valuation. I also see plenty of upside to Vimeo and HomeAdvisor and think they too could be spun-off in order to unlock value from IAC’s conglomerate discount.
More spin-offs
MTCH reporting and disclosures highlight quality of assets post-IPO
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