Vimeo Stock: Valuation Matters after all!

Vimeo is leaving Wall Street! After five years as a public company, the video platform is being sold for $1.38 billion. A lucky exit for some, a bitter deal for others.

This week, Vimeo (VMEO 0.00%↑), the video platform from my sample portfolio, announced that it will be delisted from the stock exchange and has agreed to be acquired by Bending Spoons for $1.38 billion, corresponding to an enterprise value of almost exactly $1 billion. Vimeo shareholders will receive a cash settlement of $7.85 per share, over 60% more than the last share price before the transaction was announced.

The Exit

Whether or not this is a reason to celebrate depends, of course: Those who bought in shortly after the spin-off from IAC in 2021 will make significant losses from this exit. The same applies to the institutional investors who invested in Vimeo shortly before the spin-off, valuing it at $5 billion at the time.

Vimeo's share price performance in 5 years

However, those who - like myself - collected Vimeo shares as a"Fallen Angel" over the last three years, paying between $3 and $4 per share, can be satisfied with this exit. Those who bought at less than $4 just a few weeks ago will probably be delighted.

Vimeo's share price performance in 3 years

I have mixed feelings about this transaction. On the one hand, I am making a lot of money from this acquisition as Vimeo represented around 10% of my portfolio at an entry price of less than $4. On the other hand, I believe that the company is a bargain at $7.85 and will at least double in value again over the next three years.

But it is what it is now. Vimeo's major shareholders are no longer giving the time needed for independent development, instead slipping it under the umbrella of an Italian company called “Bending Spoons”, which has previously taken Evernote and Meetup off the stock market.

Vimeo had already negotiated with Bending Spoons in early 2024. At that time, the Italians offered too little, and the two sides were unable to agree on a price. Now, CEO Philip Moyer, who has been in office for less than 18 months, has done his job; he was apparently brought on board to prepare the company for sale and negotiate a better price.

As I wrote in a widely read article (unfortunately only available in German) shortly after his takeover in May 2024:

Looking at his LinkedIn profile, it seems likely that he was brought in with the aim of positioning the company for a medium-term sale. Prior to joining Google and AWS, Philip Moyer spent several years as a partner at an investment firm, during which time he sold six companies to strategic buyers. I hope that, in the short term at least, Vimeo will not be sold and will be given time to continue developing independently for a few more years. Even so, a takeover would certainly be sweetened for us shareholders with a decent premium.

(Stefan Waldhauser 8 May 2024)

So it has come to this, then. I take some comfort in the fact that the Italians are paying a 91% premium compared to the average price over the last 60 days before the takeover. Personally, I don't think it's advisable to hold on to the shares and speculate on a higher settlement price.

The Learnings

The size of the premium paid in the Vimeo takeover reveals how grossly undervalued such second- and third-tier SaaS stocks are currently trading on the stock market when they are on the wrong side of the AI hype.

Bending Spoons is not a genuine strategic buyer who would pay a high price to realize ambitious growth plans for Vimeo. Rather, the Italians are tough financial investors known for radically reducing cost structures through mass layoffs and trimming their portfolio companies to achieve maximum profitability, quickly recouping the purchase price in the form of high cash flows from their acquisitions.

This can be easily achieved with such SaaS businesses given their recurring revenues, which is why such software companies are usually valued much higher than hardware or service companies.

The purchase price paid by Bending Spoons for Vimeo corresponds to an EV/Sales ratio of around 2.4. This is still a bargain for a profitable SaaS company with single-digit growth and a gross margin of 78%.

Vimeo's EV/Sales ratio

It is all the more astonishing that we small shareholders were able to buy into this company for years with an EV/Sales ratio of around One.

I am delighted for all of you who took advantage of this opportunity alongside me and are now realizing handsome profits.

However, at this time, we investors should also spare a thought for the Vimeo employees, many of whom are likely to lose their jobs as a result of this takeover. I hope that, as is customary in the software industry, the employees have share-based compensation structures that will make them immediately eligible for vesting in the event of such a transaction, thus ensuring they receive a decent payday at least.

Conclusion

This Vimeo exit once again confirms my long-standing HGI investment strategy (read about the basics here), which is essentially a modern form of value investing.

I had been closely following this company for five years and had published many reports on my blog. Throughout that time, I was convinced that Vimeo was worth significantly more than the enterprise value of $200–500 million at which it had mostly been trading on the stock market in recent years.

Unfortunately, Vimeo's true value could not be realized on the stock market. After five unfortunate years as a publicly traded company, it is therefore going private again, this time for an enterprise value of only USD 1 billion.

Currently, there are two types of tech stocks on the market. One type is considered an AI stock and is valued very highly, making it at risk of crashing. The other type is ignored by investors because they are prematurely considered as losers of the AI era. Vimeo belongs in this category.

I feel very comfortable holding such stocks in my portfolio whenever I am convinced that these companies have a much higher real-world value - outside the stock market. This is the case with Lyft, IAC, WBD, Angi and PayPal, which I have therefore weighted heavily as my current high-conviction stocks.

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I plan to reinvest at least some of the funds freed up by my Vimeo exit in the coming days and will probably add another Software as a Service (SaaS) “Fallen Angel” to the portfolio. To make sure you don't miss anything, sign up for my free newsletter or - if you want to get the full value and support my work - become a paid subscriber here:

*Disclaimer: The author and/or related persons or entities own shares of Vimeo. This stock analysis is an expression of opinion and not investment advice.