IAC Stock: Bargain or Value Trap?
Shares of internet holding company IAC have been unloved by investors for some time now. Here is a current sum-of-the-parts analysis with a somewhat surprising result.
The Internet holding company IAC has been one of the overweighted stocks in my model portfolio for some time. Unfortunately, IAC 0.00%↑ shareholders have had little to cheer about in recent years: the stock has yet to make a sustained recovery from the tech crash of 2022 and is still trading some 70% below its former highs of 2021.
My position in IAC is also down more than 30%, making it one of the few "problem childs" in my portfolio that I am watching particularly closely.
So here is my current take on IAC stock. It is currently trading at around 53 USD, which gives it a market cap of just under 4.6 billion USD, or an enterprise value of 6.3 billion USD.
For a holding company such as IAC, it is often a good idea to estimate fair value using a sum-of-the-parts analysis.
Fortunately, this is fairly straightforward in the case of IAC, as its portfolio includes two major listed investments whose current price is determined daily by the financial markets: IAC owns 19.8% of casino and entertainment group MGM Resorts MGM 0.00%↑ and 83.9% of home improvement platform ANGI Homeservices ANGI 0.00%↑ .
MGM
IAC invested around 1.3 billion USD in MGM during the coronavirus crisis between 2020 and 2022, making it the largest shareholder with 64.7 million shares. At an MGM share price of $45, IAC's stake is now worth around 2.9 billion USD.
This means more than half of IAC's current market cap is covered by MGM shares alone. It is worth noting that IAC's stake in MGM is currently growing steadily because MGM is buying back shares on a large scale. As a result of MGM's share buybacks, IAC's stake has risen from 16.5% to 19.8% in the last 12 months. Over the past three years, the number of MGM shares outstanding has fallen by well over 30%.
However, it should be noted that the quality of MGM's balance sheet has deteriorated in recent years. Reported debt has doubled over the past four years, reducing the equity ratio to just under 10% and dramatically increasing the debt ratio.
Such leverage is not uncommon in the hotel and gaming industry, and MGM can certainly afford this financial structure in normal times due to its multi-billion dollar cash flow. However, the coronavirus crisis has shown that a thin equity base can sometimes become a serious problem in the event of unforeseen disruptive events.
I am very curious to see what IAC's medium- and long-term objectives are with its investment in MGM. After all, such a minority stake does not really fit IAC's strategy, which has been proven for 30 years. This strategy consists of acquiring majority stakes in ailing online companies, developing them further and then selling them or, ideally, transferring them to shareholders via a spin-off.
IAC's management has been very tight-lipped about its plans for MGM and has repeatedly emphasised the great potential it sees for its online business, BetMGM in particular.
ANGI Homeservices
On top of many other challenges, home improvement platform ANGI has had a management problem of its own making in recent years. IAC CEO Joey Levin, who has been also at the ANGI helm since 2022, has taken on the task of turning around a business that has been unprofitable for years.
His predecessors had focused the ANGI business too much on sales growth and failed to create a sustainably profitable business model. This is now being corrected. ANGI needs to shrink back to health by abandoning or selling unprofitable businesses.
In 2023 ANGI sales fell by 28% to just under 1.4 billion USD. Cash flow was already positive. For 2024, a much improved result of 120-150 million USD EBITDA (adjusted) is expected after the reorganisation.
The stock market has not yet rewarded ANGI's turnaround efforts, with the company trading at just one times sales. The 424.6 million ANGI shares held by IAC are currently valued at around 1.1 billion USD at an ANGI share price of around 2.70 USD.
The lack of profitability ignores the fact that ANGI has become a market leader in the US in recent years: One in seven US households use the ANGI platform each year to search for or hire one of the approximately 200,000 tradespeople active there. I am excited to see how the company will develop in the medium term.
Valuation of the IAC share
With a share price of 53 USD and 85.9 million shares outstanding, the market cap of IAC Holding is currently around 4.6 billion USD.
Excluding the listed holdings MGM and ANGI from IAC's market cap and taking into account the cash position of 800 million USD (at the holding company level, this excludes the cash and debt positions of consolidated subsidiaries), the remaining IAC portfolio has a negative value of around 200 million USD.
Even if a certain holding discount is normal, this undervaluation, which has now persisted for some time, is somewhat surprising. This means that the entire value of the additional IAC portfolio of private companies is currently available free of charge when you buy IAC shares.
What else do IAC shareholders get on top?
Here is a quick rundown:
Dotdash Meredith
It is now almost three years since publishing house Meredith was acquired by the online publisher Dotdash from the IAC portfolio. Of course, IAC's billion-dollar deal was very unfortunate, at least in terms of timing. The Meredith business, with sales of 2 billion USD, was acquired for 2.7 billion USD (7.5 times EBITDA) in cash.
At the time, it looked like a bargain to most observers (myself included). Today we have to admit that it is not so easy to integrate an old economy tanker that is 10 times larger in terms of revenue into a modern speedboat ;-)
But seriously: Dotdash initially set itself too ambitious a timetable for the integration. It took much longer than planned to migrate the outdated online presences of the major Meredith sites to the Dotdash platform and to market them properly.
Then, in 2023, came the weakness of the online advertising market, which hit independent online publishers like Dotdash Meredith particularly hard.
All of these headwinds meant that IAC had to scrap its original business plan for Dotdash Meredith, which called for an EBITDA of 450 million USD in 2023. In the end, only 223 million USD was achieved.
But there is light at the end of the tunnel. In the fourth quarter of 2023, EBITDA (after restructuring costs) increased by almost 70% to over 120 million USD.
How much the increase will be in 2024 will depend mainly on the further development of the advertising market. For the full year 2024, I expect EBITDA to be around 350 million USD. I would therefore value the company today at at least 6 times EBITDA, i.e. a good 2 billion USD.
Turo
IAC owns 39.2 million shares in Turo, the world's largest car-sharing marketplace. This makes it by far the largest shareholder with a 39% stake. IAC has an option to acquire an additional 10% of the shares (at a valuation of 2.0 billion USD).
According to the company, the world's largest car-sharing marketplace is actively used by 3.5 million people. 360,000 vehicles are available on the "Airbnb for cars" platform.
Since IAC joined the company, Turo's revenue has grown from 142 million USD in 2019 to 880 million USD in 2023. However, after several years of rapid growth, revenue growth was only 18% in 2023.
Most importantly, Turo has reached break-even for several years now. However, profitability fell in 2023 and the recent development of gross margin, which dropped from 54% to 51%, is unlikely to please investors.
Turo has not yet been able to pull off the IPO originally planned for 2023. However, this has less to do with sub-optimal business figures and more to do with the fact that the market's capacity for IPOs is still very weak. If you are interested, you can read the (still incomplete) Turo prospectus here.
Based on some recent share repurchases, I estimate that Turo is currently worth around 20 USD per share, or just over 2 billion USD. I estimate IAC's stake in Turo to be around 800 million USD.
Care
The Care platform has revenues of around 375 million USD in 2023, growing slowly (3% year on year) and is profitable. Whatever this means exactly, to my knowledge no exact figures have been published.
IAC paid 500 million USD for Care when it was acquired at the beginning of 2020 and has since increased its revenues by more than 70%. I would conservatively estimate a value of 400 million USD for such internet stocks due to the fall in valuations, i.e. roughly one times sales.
Vivian Health
IAC owns 75% of Vivian Health, an online recruitment agency specializing in the US healthcare market with over 1 million registered users. The company was valued at 400 million USD in a 60 million USD funding round in April 2022. Over the course of 2023, its rapid growth has leveled off from 51% in Q1 to 25% in Q4 (both year-on-year).
The valuations of such companies have come down significantly over the last two years. I would currently value the 75% stake at 100 million USD.
Other
In January 2024, it was announced that IAC was selling the Mosaic Group for 160 million USD to Italian company Bending Spoons, which also owns Evernote. The Mosaic Group is a shrinking but profitable business with a range of mobile apps including PDFHero and Robokiller, all of which have seen their best days.
The IAC portfolio also includes a number of other assets, such as the profitable but declining search business. This generated 629 million USD in revenue in 2023 and, after a slump in profits, still generated 44 million USD in operating profit. There is also an unknown stake in the recruitment company EmployBridge (from the sale of Bluecrew).
Based on my experience with the sale of the Mosaic Group, I would conservatively estimate a total value of 200 million USD.
This gives a total estimate of 3.5 billion USD for the fair value of IAC's unlisted assets:
Given the approximately 86 million IAC shares outstanding, this would imply an undervaluation of 41 USD or, in other words, a fair value of 94 USD for the IAC share.
Share buybacks
IAC's management is certainly trying to make the investment community aware of this apparent undervaluation. In the first half of this year, the company also bought back a large number of its own shares. As a result, the number of IAC shares outstanding fell from 89 million to 86 million in the last 12 months.
Conclusion
It seems to me that many investors' perceptions of the IAC portfolio have been distorted by the obvious difficulties at ANGI and Dotdash Meredith. The other investments, some of which are performing much better, are currently being ignored.
As an IAC shareholder, you are getting a whole portfolio of unlisted assets for free, which I believe to be worth 41 USD per share. This represents a current upside of 77% for the IAC share.
Following the Q4 2023 report, I feel confirmed in my view that the IAC portfolio is significantly undervalued. Consequently, the IAC share will remain heavily weighted in my model portfolio in the coming months.
Investors will need a lot of patience and possibly even extreme staying power, but sooner or later the market will recognize this mispricing and correct it. The subsequent re-rating can happen very quickly, as we have seen in recent weeks with Vimeo VMEO 0.00%↑, which has gained over 50% in just 4 weeks since my Vimeo article on 25 February.
If you would like to follow IAC with me in the future, you can
*Disclaimer:
The author and/or associated persons or companies own shares in IAC. This article is an expression of opinion and does not constitute any investment or financial advice.
Danke für die Vorstellung und deine Mühe, Stefan. Es schaut aber so aus als vernachlässigst du die Schulden bei DotDash und berücksichtigst die Holding Kosten auf IAC Ebene nicht. Oder?