IAC/InteractiveCorp (NASDAQ:IAC) continues to power through. Its latest quarter earnings report shows just how good its business is. So the brief pause in IAC stock, due mostly to the market volatility, should prove temporary.
IAC reported earnings of $1.40, which beat the consensus by a wide margin of $0.47 a share. Revenue grew 17.2 percent to $950.6 million. These numbers only tell part of the story. Management improved shareholder value by creating a new public subsidiary (“ANGI”) which will unlock the company value in the several-billion-dollar range.
In its company letter, management complained that the market valued IAC, less its Match and ANGI stake was negative $1.4 billion. The steep discount to fair value is understandable: selling ownership triggers taxes and other separation costs.
Still, the financial profile of the subsidiaries and spinoffs is healthy while units like Vimeo will generate over $100 million in subscription revenue.
IAC may grow cash flow the way it does by levering its business on other successful platforms. This includes Alphabet Inc (NASDAQ:GOOGL), Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT).
These platforms all encourage use of their infrastructure. IAC benefits by growing up within each and all of those platforms. For example, it spent $4 billion on Google and Facebook in the last 10 years to bring in users. IAC runs these ad campaigns in tandem and with high specificity.
Such a relationship is win-win: the platform earns ad revenue and IAC, in turn, grows its user-base.
IAC believes it may deliver the highest adjusted EBITDA in the company’s history. Expedia Inc (NASDAQ:EXPE) will grow its EPS by at least 15 percent in the next half-decade. Match Group Inc (NASDAQ:MTCH) stock is trading at highs, thanks to the success of Tinder.
Management pointed out that with 109 million unmarried people in USA aged 18 and older, Match.com has room to grow. The dating site ended 2017 with 7 million users. It clearly has a wide addressable market that could lead to higher profits for years to come.
IAC’s creation of ANGI Homeservices could bring in $270 million in adjusted EBITDA. Short-term results will underwhelm markets while the company makes investments without sacrificing the unit’s long-term future.
In the video space, Vimeo may grow after adding an array of video tools. IAC is also simplifying Vimeo by merging ad insertion, live streaming, and publishing under one roof.
Just as Alibaba Group Holding Ltd (NYSE:BABA) supported its growth by pivoting from desktop to mobile, IAC will do the same. Most of the mobile products at IAC are subscription-based. But desktop usage will outpace mobile for a while longer.
Unfortunately, IAC is still tied at the hip with Google, so desktop will matter more than mobile, at least for now.
Of the 20 targets on Wall Street, the average target price is $162, which implies a double-digit upside. Finbox.io users who built 8 models have a $156 average target price (15% upside). Of the models available, the five-year DCF Growth Exit model is most suitable for estimating IAC’s fair value.
By assuming revenue growth in the single digits over the next five years and assigning a discount rate of between 8 – 9 percent, IAC stock has 12 percent upside. Here is a link to the model.
At a ~ 33x P/E, IAC stock looks expensive and is not a great fit for the value investor. Yet the stock is discounted to its sum of the parts. The expected revenue growth implies IAC stock is worth more than the recent $137 share price. After the broad market selling in technology abates, IAC may resume its upward trend and set new highs.