IAC Is A Steal, But It Needs A Deal

IAC’s History

I’ve been holding IAC stock for nearly a decade, and I’m sure some of you have held it even longer. After a while, you think you know the company, but actually that isn’t really the case. IAC is changing all the time because of spin-offs, investments, acquisitions. The company is constantly evolving, and also (in my humble opinion) constantly being mispriced just because of the complexity of it.

We all know it’s close to impossible to predict short-term movements in the market or especially individual names, but real value always comes to the surface. And I believe that the scene setting for IAC’s value to resurface once again.

What’s inside the box?

Let’s do a quick unboxing, shall we? The value of IAC essentially consists of three parts:

• Public companies (MGM, ANGI)

• Private companies

• IAC’s other assets and liabilities

Public companies

Finding out the value of the first part is extremely easy: just look it up. They are publicly traded companies. Sure, you could think MGM or Angi are undervalued, but in that case, you could just buy these companies outright without having to bear any corporate overhead costs of the IAC construction.

While I, personally, do think MGM and Angi are currently undervalued, and by quite a big margin, I won’t go into detail about this and take their face-value as of today 15th of August 2024:

• MGM: 11,56 b – 21% stake – $2,4b

• ANGI: 1,29 b – 84% stake – $1.08b

One strategy which IAC seems to be banking on, is letting both MGM and Angi buy back as many shares as possible. In essence, IAC keeps enlarging its stake without having to deploy any extra capital.

Private companies

Now for the tricky part, how can you put a value on the private companies within IAC, as well as the smaller start-ups, which are brewing in their lab? Let’s first rank them to size:

• Dotdash Meredith: publisher

• Turo: carsharing

• Care.com: caretakers marketplace

• Search (older segment, ask)

• Vivian Health: healthcare marketplace

• The Daily Beast

Some of these are a bit easier to value than others. We have disclosed sales and revenue figures, we have information about deals/investments, we have information about all kinds of KPI’s. As I’ve mentioned from the beginning: this is where I believe the market has it wrong. These private companies are worth a lot more than what IAC’s stock price is reflecting right now.

Dotdash Meredith

Dotdash Meredith is the largest one and will be instrumental in the future of IAC. In October 2021, Dotdash (a subsidiary of IAC) purchased Meredith’s non broadcasting assets for $2,7B, mostly being magazines and websites. Back then, IAC projected to have $450m in adjusted EBITDA from the digital assets alone by 2023. This was a risky move, but it seems it’s finally starting to work out.

In the latest shareholder letter, these were comments of Joey Levin (IAC’s CEO):

If incremental revenue continues to convert to Digital Adjusted EBITDA at current rates, we should be growing Digital Adjusted EBITDA at least 25% in the upcoming quarter. Print profitability should continue to more than offset Corporate costs, and bookings and pipeline suggest we can deliver more earnings than previously expected – we now expect $290 to $310 million of Adjusted EBITDA for the year.

While digital and print are about 50/50 in terms of revenue, digital makes up 85% of the EBITDA generated. Digital is growing 12% y-o-y with print declining 7% y-o-y, so the longer this goes on, the more profitable the company should become.

One interesting competitor is Ziff Davis (ZD). It’s similar in the sense that it’s also mostly US focused, and it has digital magazines and web properties. It recently bought CNET for $100m.

Ziff Davis is trading at a $2b market cap & according to Yahoo Finance is at a $339m TTM EBITDA. and trading at 6,9 EV/EBITDA & 26 P/E.

If we take Dotdash Meredith’s projected $290m EBITDA and place a 7 multiple on it, we get to $2b in enterprise value.

TURO

The other large and interesting private business they own (partially) is Turo. It has filed for an IPO in 2022, but has still not pulled the trigger. Market conditions to do an IPO will likely improve, with rate cuts seemingly being closer rather than further. Turo has some impressive KPIs it can use to go public with a strong start.

Turo’s latest S1 update is as fresh as it gets – from August 8, and you can find it here.

Boasting a Net Promotor Score of 77, a key leading indicator of further growth, the company is poised to keep up the traction. They currently have 365K active listings (=cars) and 3.5 million active guests on the platform. Turo is by far the largest ‘new’ car renting player in the industry.

The S1 really has treasures hidden inside, so if you’re interested, please go through it yourself. We’ll just focus on what could be the value of IAC’s stake in Turo.

For H1 of 2024 Turo did $450m in revenue, which is 10% more than a year earlier and had a net income of nearly $10m. For the full year, the company might come really close to hitting $1b in revenue.

Now what is the ‘value range’ for this business? We have some hard facts. In March 2023, SK (a South Korean holding company) sold 2.98% for $67m. This valued the company at just under $2,25b. IAC also used its warrant to buy an additional 10% of Turo at a $2b valuation. In the past, it also purchased a little bit more Turo shares at a $3b valuation.

So we can safely say the private markets think the value is around $2b to $3b. A wide range, I know. But let’s look at two peers: Airbnb & Uber.

Uber is trying to compete with Turo by launching similar services, and obviously, has a lot of knowledge about the car sharing market.

Airbnb’s model is very similar to Turo, that’s why Turo is sometimes called ‘the Airbnb of cars’.

• Uber does $40b in sales, $2b in income and is valued at $150b.

• Airbnb does $10b in sales, $4,8b in income and is valued at $75b.

Placing a 4 to 8 P/S multiple on Turo’s 1b in sales gives us a $4b to $8b valuation. Now, it’s unclear if Turo can grow in large enterprises like Uber and Airbnb, and if it will ever become a profitable powerhouse, so we have to discount for that. But let’s just assume that Turo is actually worth $4b today and IAC has over 32% of the business + a warrant for another 10%. The current stake would be worth $1,4B.

Turo obviously has been in ‘sales mode’ either to prep for the IPO, or for an outright sale. CEO Andre Haddad was on Bloomberg a month ago to essentially deliver a sales pitch.

Just to close off the discussion on Turo, I’d like to introduce an interesting little-known fact.

The well-known fact is that Uber has been launching services similar to Turo. It would be very reasonable to think that Uber could have some interest in Turo. The little-known fact is that current CEO of Uber Dara Khosrowshahi actually has a very rich history with IAC. Dara started as CFO of IAC Travel (=Expedia) and later become the CEO of the company. He knows IAC very well.

So while Turo has been waiting to IPO, I can also imagine a giant like Uber buying up Turo straight from the private markets with instant economies of scale & exchange of technology benefits. It just feels like there’s a lot of potential for a win-win situation.

Emerging & Other

We can bucket all the other private assets in the Emerging & Other category, like IAC does it themselves. Care.com, Search (Ask), Vivian Health & The Daily Beast.

I actually wrote an article about Care.com in October 2019 saying it would be an attractive take-over candidate and specifically mentioned IAC. Care.com traded at $10 at the time. IAC bought it 1 month later for $15 per share, or $500 million. At the time, Care.com did $192m in FY sales. Currently, Care.com is generating $87m of sales every quarter, or nearly $350m per year. While growth has been slowing, the business appears to be cash-flow positive as we read in Joey’s quarterly letter to shareholders, and I would thus place Care.com at the very least at a $700m valuation (2x sales).

Search (Ask) is obviously a dying business in the long run, revenue plunged by 43% year-over-year to $100m for Q2. But it’s still bringing in cashflow. The 2024 outlook for Search is $15m to $25m in adjusted EBITDA.

Moving to Vivian Health, revenue is growing 6% year-over-year. From this press release, we learn that Vivian Health now has 2 million healthcare professionals on the platform (and only had 1 million 16 months ago). So while revenue growth might not be so impressive, the platform itself is growing solidly. Back in 2022, Thoma Bravo together with IAC and Collaborative Fund injected another $60m in the business. While the valuation was not made public, I’d assume Vivian would be worth in the range of $150 to $300m.

The Daily Beast has not performed very well the last few years. A sale was on the table, but finally, they decided on a partnership with Ms. Coles and Mr. Sherwood, two media veterans, to turn the ship around. It was last reported that The Daily Beast lost around $9m per year, but that the cost cuts would put The Beast at break-even for FY 2024.

IAC’s other assets and liabilities

Of course, it’s great to have all these businesses in one place, but there’s also a cost associated with that. IAC itself is generating corporate costs and this has to be taken into account carefully when trying to do a SOTP analysis.

Corporate costs will add $100 million in negative EBITDA for 2024. Stock-based compensation adds another $125 million to that. This is quite a large amount if you estimate to generate $435m of EBITDA for the year prior to taken into account these two costs. Adjusting for them, you end up with only half ($210).

While this could all be very reasonable, it’s a fact that revenue has been slowing down (even though it’s a very deliberate decision at Angi’s and other parts of the business like Search), and one way or another, IAC can’t keep slimming down to profitability.

IAC has $1,7b in cash & equivalents, of which $1b is held at the mother company. The other $700m is split between Dotdash Meredith and Angi. Dotdash holds $1,5b in debt and Angi holds $500m in debt. IAC assumes no debt. IAC bought land under its iconic NY building for $80m.

IAC officially has $1,12b in tangible assets such as land, buildings and machinery, but office and land in NY could be worth substantially more. Some of those assets will belong to Dotdash Meredith and Angi, but even if we take only half for IAC ($600m), we could say that at the holding level there’s a semi-liquid $1,6b in assets or around $18 per share on the IAC level alone (with 85 million shares outstanding).

Are there any upcoming catalysts?

It’s always a very similar story with IAC. The company can be overvalued vs SOTP and undervalued vs SOTP for long periods of time. There’s simply not that much attention given to the stock, and I also feel that management is not necessarily unhappy with this. The company culture gives me the feeling they like to work quietly in the shadows and take a long-term view on things. This also explains why they only spin off or IPO private companies at peak value creation. It doesn’t look like they are in a hurry.

The stock can certainly grind higher slowly and surely, but especially the last couple of years it has been range bound. We will need some kind of catalyst to have a meaningful impact on the share price. Luckily for us, there are plenty of catalysts on the horizon.

Turo IPO

One transaction that could be announced at any moment now, especially with interest rates going down, is an IPO of Turo. The CEO has stated in the Bloomberg interview that the company is ready once the market is ready.

A Turo IPO could, of course, be very negative, as it could be a total flop and sink IAC’s share price if it gets a lot lower valuation than we speculate on. One of its competitors, Getaround which IPO’d during the pandemic, lost 99% of its value. But let’s assume this is not the case.

If Turo is effectively trading on the public markets at $4b, this solidifies the value for IAC, which the market can no longer ignore. In that case, IAC would hold around $4,9B in public securities. This would translate into $57 of value per share, not even taking into account cash, assets, and any private companies.

MGM stake

The MGM stake has always been an odd one for me. It was a brilliant business decision to buy such as great company in the depths of the pandemic – when it was distressed and cheap! But, to be fair, it’s not really a typical IAC business. The company specializes in internet businesses, not gambling companies. IAC has stated publicly that they were actually mostly interested in BetMGM the online sports betting part of MGM which they hold in a joint venture with British Entain (50/50). A separate deal was not possible, so they bought shares in MGM directly.

There have been rumors that Entain was going to sell BetMGM, or would be sold entirely. I believe IAC is probably contemplating several options going forward:

1. It either sells the MGM stake with very nice profits and gets $2,4b in cash to deploy into new opportunities. This is unlikely since they keep investing heavily into BetMGM

2. Or it makes an attempt to help MGM buy out Entain’s stake of BetMGM so that it’s 100% owned by MGM

3. Or it makes a deal where IAC buys BetMGM directly, with MGM or Entain possibly remaining as a minority shareholder so that incentives remain aligned.

In any case, I do believe the MGM purchase was a decision made during Covid because of rock bottom prices, and I do believe now the team as IAC has the time and resources to map out a strategy around this. Any good transaction here could be a major catalyst for IAC’s share price.

Angi deal

Angi is turning the corner on profitability, but will need time to grow revenue again. It’s a very large opportunity, which IAC remains extremely bullish on. However, we should also be honest with ourselves. There is a lot of competition and it will only grow. In Europe, there are a lot of smaller competitors, but if we only take the US, think about:

• Porch – $134m

• Thumbtack – private – latest valuation in 2021 at $3,2b

• Yelp – $2,3B

• Houzz – private – latest valuation in 2017 at $4b.

Google & Amazon Home Services are also competitors, but I don’t see any possible transactions with them.

I think it’s time for Angi to buy some growth by acquiring or merging with one of the above businesses. They have had bad experiences losing traffic and profits doing the switch from HomeAdvisors to Angi, and they have invested so much in the brand they will not want to do another rebranding. But with more scale comes better options for Customers and Service Professionals, more pricing power, etc.

In 2023, an activist investor in Yelp even publicly proposed a merger of Yelp and Angi to bolster the offering (Yelp jumps as activist investor seeks sale or merger with Angi).

There’s also the option of just selling Angi to one of these competitors. Similar to MGM, this would free up cash for IAC to re-invest in more profitable ventures or simply buy back shares.

As a final option, IAC could purchase the remaining float of Angi (which is small) and at current prices it would only cost them around $200m to get all shares in their hands. It could effectively be a way for IAC to take the company private, build with the pressures of the public markets to show profits, and take them public again at a much larger valuation. Buy low, sell high, kind of thing.

Any other major transaction

IAC’s management is always thinking about capital allocation and how they can maximize shareholder value. Essentially, they have 3 options at their disposal:

1. Return capital to shareholders via share buybacks or dividends

2. Deploy extra capital in their existing businesses

3. Venture into completely new businesses

They have publicly stated that they always prefer to invest in the businesses they know (Dotdash, Angi, etc…) but that they are also looking at opportunities both in private & public markets. There was even a very slight chance of IAC getting involved in the Paramount deal, but they wisely didn’t get involved in the end (Barry Diller Says IAC Bid for Paramount Is Over).

I therefore believe IAC is working up option 2 and is likely looking for new deals related to Angi or MGM.

Any major transaction, be it a sale or an acquisition, in any of their businesses might shine a new light on IAC and rerate the stock.

Stock-based compensation to CEO Joey Levin

One final point I’d like to make is the CEO’s compensation. It is well known that IAC’s CEO Joey Levin received quite a good pay package back in 2020. There was even some backlash.

However, the majority of this pay package is linked to shares, which need to vest over time. The vesting schedule is tied to the share price of IAC.

As you can see, if IAC’s stock price is below $110 by 2030, none of Joey Levin’s shares will vest. When the price is $223.32 is reached, he will receive 3m shares, which explains the large pay package.

While I certainly believe he is not motivated by money alone, this sure is an extra financial motivation to get the stock price moving. Let’s say that IAC effectively reaches $177.45 by 2030, this would equate to 22% per year in share price appreciation, which is not bad at all.

Investment summary

Making the case to invest in IAC without bringing up any sort of SOTP analysis is, of course, not done. It’s a classic way of analysing this type of business: we just add up all the businesses, and find that we’re very much undervalued.

Obviously, it’s not that easy.

1. In many of these SOTP (sum of the parts) analysis, analysts tend to forget to take into account the corporate overhead costs that also weigh down on, the business. I tried to account for this by taking the annual overhead costs times 10 multiple and detracting this from the total.
2. Many of these SOTP analysis rely on the private businesses actually being worth what we think they are worth. Like I said from the start: the value lies in the private companies. In IAC’s case, the smaller ones do not move the needle, and the public ones are not that relevant. Figure out the true value of Dotdash Meredith and Turo, and you will figure out if there’s any upside here.

With that out of the way, I present you my own figures on what I believe IAC’s true share price is.

As you can see, I end up with $99 per share. However, we are heavily speculating on the value of the private businesses and all of them, frankly. I tend to place an extra 30% discount to the intrinsic value as this historically has often been the case, which brings us to $69.3 per share. This still gives 33% upside from today’s price if that gap would be closed in the coming months by any catalyst mentioned earlier in the article.