IAC Stock: The 10th Spin-Off On The Horizon
You get a whole portfolio of unlisted assets 'for free' when you buy IAC shares. Why I'm optimistic that the stock market will discover and correct the mispricing in 2025.
This post is an update to a post that was first published in May 2023. It was expanded and updated after the Q3 2024 report on November 12, 2024.
IAC, an internet holding company, has been one of the bigger holdings in my model portfolio for a while now. Unfortunately, IAC 0.00%↑ shareholders haven't seen much return on their investment in recent years. My IAC position is also down 30%, making it a "problem child" in my portfolio that I am watching very closely.
So here's another update on the IAC share. After the Q3 2024 figures, it's trading at around $47, which means a market capitalization of $4.0 billion based on 84.4 million shares.
For a holding company like IAC, it makes sense to estimate its fair value using a sum-of-the-parts analysis. Fortunately, this is easy for IAC because its portfolio includes two publicly traded holdings whose current price is determined daily by the financial markets: IAC owns 21.8% (64.7 million shares) of the casino and entertainment company MGM Resorts and 85.3% (425.6 million shares) of the ANGI Homeservices platform.
Angi Homeservices
The most important IAC news after the third quarter of 2024 was the planned spin-off of the Angi home services platform in 2025. This would make Angi the 10th company to be spun off from the IAC portfolio over the past 20 years and distributed to IAC shareholders.
Specifically, these plans mean that IAC shareholders will receive approximately 5 ANGI shares for each IAC share in their portfolios. This is to be thought of as a dividend in kind in the form of a company share.
Following the announcement of the spin-off plans, Angi's share price fell by 30%, apparently because shareholders are not exactly enthusiastic about the independence. This means that the Angi share is now worth only about $1.70, i.e. this "special dividend" is worth about $8,50 per IAC share, which is 20% of the IAC share price.
Clearly, such a spin-off does not add value in and of itself. In theory, IAC's share price should be correspondingly lower after the transaction. However, as an IAC shareholder, you can reasonably hope that the undervaluation of IAC will be even more pronounced and that the "dividend discount" will not be as high as the value of the Angi shares that will be allocated to you.
What exactly does an IAC shareholder get by adding Angi to his portfolio?
A look at Angi's price chart does not inspire euphoria:
The Homeservices platform Angi, which has been developed within IAC since 2017, has faced a number of challenges in recent years, including a homemade management problem. IAC CEO Joey Levin took the helm himself from 2022 to early 2024 and pushed to restructure the company, which had been unprofitable for years.
His predecessors had focused the Angi business too much on sales growth and had failed to create a sustainably profitable business model. This is now being corrected. Angi is shrinking back to health by divesting unprofitable units and cutting marketing budgets.
Of course, this comes at the expense of Angi's sales. In 2023, they fell 28% to just under $1.4 billion. Cash flow was already positive. For 2024, after the reorganisation, sales are expected to be no more than $1.2 billion, but earnings are expected to improve significantly to $130-150 million EBITDA (adjusted).
This means that Angi is back on a stable footing and has a profitable business model that is about to return to positive net income in 2024.
The stock market has not yet rewarded Angi's restructuring efforts; the company trades at less than its sales. Angi's 500 million shares currently have a market capitalization of $857 million at a share price of about $1.70. The enterprise value is only slightly higher.
Investors are completely ignoring the fact that Angi has become a market leader in the U.S. in recent years: One out of every seven U.S. households uses the Angi platform each year to find or hire one of the approximately 200,000 tradesmen on the platform.
I am very excited to see how Angi will develop in the medium term under CEO Jeff Kip, who has been in office since April 2024. Jeff is a veteran of IAC, having served as Chief Financial Officer and also spent years overseeing Angi's international business, which has significantly outperformed the U.S. business during that time.
I look forward to the Angi Spin-Off from IAC. I would like to warn, however, that Angi's share price may stay under further pressure after the spin-off, as many IAC shareholders will sell their shares to take advantage of the special dividend.
MGM
IAC invested approximately $1.3 billion in MGM between 2020 and 2022 during the Covid crisis and is now the largest shareholder with 64.7 million shares. At an MGM share price of $37, IAC's stake is now worth approximately $2.4 billion.
MGM shares alone account for more than half of IAC's current market capitalization. It is worth noting that IAC's stake in MGM is currently growing steadily because MGM is repurchasing shares on a large scale. As a result of MGM's share repurchases, IAC's stake has increased to 21.8%. Over the last 3 years, MGM's outstanding shares have fallen by well over 30%.
I am very curious as to what IAC's medium- and long-term goals are with its stake in MGM. After all, such a minority holding is not really in line with IAC's strategy. That strategy actually consists of acquiring majority stakes in ailing online companies, developing them and then selling them or, ideally, handing them over to shareholders via a spin-off.
IAC's management has been quiet about its plans for MGM and continues to emphasize the great potential it sees especially for its online business, BetMGM.
The Valuation Of IAC Shares
At a price of $47 and 84.4 million shares outstanding, IAC Holding's market capitalisation is approximately $4.0 billion.
Excluding the publicly traded MGM and ANGI holdings from IAC's market capitalisation, as well as its cash position, which has grown to $1.1 billion (at the holding company level, this excludes the cash and debt positions of consolidated subsidiaries), the rest of IAC's portfolio is valued at less than 0.
If, as planned, Angi is removed from this calculation in the course of 2025, it will become apparent after the spin-off that the value of the future IAC share (ex-ANGI) is already fully covered by the MGM stake and the cash reserves, assuming that prices remain the same.
This means that all unlisted assets from the IAC portfolio are included for free when you buy IAC shares.
What do IAC shareholders get on top of MGM and Angi?
Here is an updated overview:
Dotdash Meredith
It has been three years since online publisher Dotdash rom the IAC portfolio acquired the venerable publishing company Meredith. IAC's billion-dollar deal was very unfortunate, at least in terms of timing. The Meredith business, with revenues of $2 billion, was acquired for $2.7 billion (7.5 times EBITDA) in cash at the time.
At the time, it looked like a bargain to most observers (including me). Today, it shows that it is not so easy to integrate a 10 times larger tanker from the old economy into a modern speedboat... ;-)
But seriously: Dotdash initially set itself an overly ambitious integration schedule. It took much longer than planned to migrate the outdated online presences of the major Meredith sites to the Dotdash platform and to implement a proper monetization strategy.
Then, in 2023, the weakness in the online advertising market hit, particularly affecting independent online publishers like Dotdash Meredith.
All of these challenges led IAC to scrap its original business plan for Dotdash Meredith, which had projected EBITDA of $450 million in 2023. In the end, only $223 million was achieved. In 2024, the restructuring will make significant progress, with EBITDA (after restructuring costs) expected to reach approximately $300 million, which would be 35% higher than in 2023.
So we still have a long way to go. But there is light at the end of the tunnel: the publisher's digital transformation is progressing well, and digital advertising revenues are now significantly larger than the shrinking print business. The digital business grew 16% in Q3.
I would value DotDash Meredith today at 7.5x EBITDA, or at least $2.2 billion. Even though the valuations of the media companies have come down a lot in the years since the acquisition, the quality of the revenue has increased significantly since the merger.
Turo
IAC is by far the largest shareholder in the world's largest car-sharing marketplace, Turo, currently owning 32% of the company. 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.
Recently, IAC exercised an option negotiated years ago to increase its stake at a valuation of $2 billion. Turo has been preparing for its own IPO for some time; details can be found in the Turo prospectus.
In a reasonably friendly market environment, Turo's valuation is likely to be in the range of $3 billion-plus, with revenues approaching $1 billion, double-digit growth and profitability already achieved.
IAC's stake would be worth at least $1 billion. Investors may finally be alerted to IAC's significant undervaluation if the value of the Turo stake were to be disclosed in an IPO.
However, if the IPO window remains closed for Turo, a sale of the company would be a distinct possibility. In my Uber investment story, I had found good arguments as to why Uber could be considered as a strategic buyer.
Care
The Care platform generated approximately $375 million in revenue in 2023, is growing slightly (3% year-on -year), and is profitable. Whatever that means, unfortunately, the exact numbers have not yet been released. This will change starting with the upcoming Q4 2024. From next quarter, IAC observers will be able to take a closer look at Care as it becomes a separate segment in IAC reporting.
IAC paid $500 million for Care when it was acquired in early 2020, and since then it has grown its revenue by more than 70%. I would continue to conservatively value it at $500 million based on the declining valuations for such internet stocks. This is equivalent to the purchase price four years ago and less than 1.5 times sales.
Other Holdings
IAC owns 75% of Vivian Health, an online recruitment company specializing in the U.S. healthcare staffing market with over 1 million registered users. The company was valued at $400 million in a $60 million financing round in April 2022. Over the course of 2023, the company's torrid growth flattened from 51% in Q1 to 25% in Q4 (each year-over-year). Valuations of such companies have declined significantly over the past two years.
The IAC portfolio includes a number of other assets, such as the declining search business. In addition, there is an unknown number of shares in the staffing company EmployBridge (from the sale of Bluecrew).
In the absence of better knowledge, I assume a total value of $200 million for these assets.
This results in the following estimate of the fair value of IAC's unlisted assets:
This $3.9 billion, in view of the approximately 84.4 million IAC shares outstanding, represents an undervaluation of $46 for the IAC share.
Conclusion
Not only we IAC shareholders are frustrated that the capital market has not sufficiently appreciated IAC Holding for some time. The management team feels the same way.
As an IAC shareholder, you get a whole portfolio of unlisted assets ‘for free’ when you buy IAC shares, which I estimate to be worth $46 per share to the best of my knowledge and belief. I have the impression that the planned spin-off of ANGI is also being initiated at this time to reduce complexity in the group structure and thus highlight this ‘gifted’ portfolio even more clearly.
After the Q3 2024 report, I feel vindicated in my assessment of the significant undervaluation of IAC stock. It will remain highly weighted in my model portfolio with full conviction in the coming months. I have even added a little more to the IAC position recently.
Investors need a lot of patience here once again. But I am optimistic that in 2025, with an Angi spin-off and an IPO or exit of Turo, the stock market will also discover and correct this mispricing. The subsequent re-rating can happen very quickly, as we have seen in the last few weeks with Vimeo stock VMEO 0.00%↑ from my portfolio, which gained about 50% in just one week after the Q3 2024 report.
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 and Angi. This article is an expression of opinion and does not constitute any investment or financial advice.
I think you forgot to subtract $1.5bn in DotDash debt.