Over the last 20 years, finding an internet-related business that will be successful over the long term has been a daunting task for both entrepreneurs and investors. Back in the day, no one knew whether Alphabet (GOOG, Financial) or Pets.com would be the best investment choice. At some point in the late 1990s or early 2000s, Webvan, eToys, Infospace, Geocities, eXcite and govWorkds were all considered must-own internet stocks. However, they all eventually failed after being unable to generate a profitable business plan.
One company that has navigated the internet businesses world reasonably successfully is IAC Inc. (IAC, Financial), formerly known as InterActiveCorp. The company operates as a media and internet holding company with current brands such as Angi Inc. and Dotdash Meredith. The company has an interesting history and has been affiliated with companies such as Match Group (MTCH, Financial), Liberty Media, HSN, USA Networks and Ticketmaster.
The Dotdash Meredith segment is the largest print and digital publisher in the country with iconic brands such as Better Homes & Garden, People, Food & Wine and Southern Living. The company prints over 350 million magazines annually and its brands reach approximately 95% of women in the U.S. The Angi division, which was previously called Angie's List, is a digital marketplace that connects home service professionals with consumers for repairing, remodeling, cleaning, landscaping, maintenance and other enhancement services. In addition, the company operates websites that offer general search services and information, including Ask.com, Reference.com, Consumersearch.com and Shopping.net. Other offerings include Care.com, Bluecrew and entertainment website The Daily Beast. The company also owns a large stake in MGM Resorts International (MGM, Financial).
With its origins dating back to 1986, IAC currently has a market capitalization of $4.9 billion.
Financial review
IAC's financials are typically confusing due to recent acquisitions or divestitures as well as minority interest line items. Revenue increased 41% in the third quarter of 2022, largely due to the acquisition of Dotdash Meredith in December 2021. Pro forma revenue for the Dotdash Meredith business showed a decline of 19% as macro headwinds affected advertising revenue as well as the company’s decision to shut down underperforming publications.
Angi's third-quarter results showed revenue growth of 8% and an improvement in operating income to a loss of $11.1 million compared to a $15 million loss in the prior-year period. Adjusted Ebitda increased 85% to $22.9 million compared to $12.4 million in the prior quarter.
For the nine-month period ended Sept. 30, operating cash flow turned negative at -$101.5 million due to working capital needs and a large tax payment related to the Meredith acquisition. After capital expenditures of $112.8 million, free cash flow was -$214.3 million.
As of the end of the third quarter, the company had $1.6 billion in cash and marketable securities, of which IAC held $1.2 billion, Dotdash Meredith held $139 million and Angi held $329 million. The company also had $2.1 billion in long-term debt, of which Dotdash Meredith held $1.6 billion and Angi held $500 million. IAC’s economic interest in Angi as of that date was 84.3% with a voting interest of 98.2%. IAC also owns 64.7 million shares of MGM Resorts International.
Valuation
It is hard to value IAC due to GAAP operating losses and the constant reshuffling of its operating businesses through acquisitions and divestitures. On a price-book basis, the company was selling at about 74% of book value at quarter end. The stock has typically traded above one times book value.
The average price target for analysts that cover the company is $80.25 per share. The highest price target is $130 by Benchmark and the lowest estimate is $46 by UBS.
IAC owns 64.7 million shares of MGM, totaling approximately $2.6 billion, which equates to 53% of its current market cap.
Guru trades
Gurus who have purchased IAC stock recently include Steven Scruggs (Trades, Portfolio) and First Pacific Advisors (Trades, Portfolio), while who have sold out of or reduced their positions include Baillie Gifford (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates.
Summary
IAC is facing temporary headwinds in the core media business as well as in the home service business. While the transition of Meredith’s print revenues to digital revenues may take some time, the company has a comprehensive migration plan. Currently, it has 174 million unique online users. This puts Dotdash Meredith as one of the top 10 internet media properties in the U.S.
The stakes in Angi and MGM amount to most of its enterprise value today, which leaves the market attributing very little value to the other businesses such as Care.com and Turo. One of the key investment points is its ability to invest in new categories by acquiring companies at reasonable prices before they become too expensive. The recent sell-off in the stock price may represent an attractive entry point for long-term investors, particularly if the company is able to extract value from its variety of holdings.
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