You know the company, even if you don’t think you know the company. Or, you at least know IAC/InterActiveCorp (NASDAQ:IAC) better than you think you might. An investment in IAC stock is an investment in dating site Tinder, services directory Angie’s List and online video repository Vimeo, just to name a few.
It’s not an entirely unfair description either, though that description might sell InterActive Corp stock a little bit short. It’s also something of an incubator, getting digital businesses on the cusp of success by lending them a hand and some experience. It’s a formula that works, too.
Granted, while the formula may work, the valuation doesn’t work — at least for some investors. The trailing P/E of 48.5 seems ridiculous, at first glance.
Three simple images paint a more compelling picture of IAC stock, though.
1. Revenue and Earnings Outlook
IAC stock isn’t going to win any value awards, but as the old cliche goes, you have to pay for quality. InterActiveCorp offers plenty of that. It comes in the form of revenue growth, and subsequently, income growth.
Granted, the future looks better than the recent past does, but such assumptions have proven dangerous before.
The final quarter of last year, however, may have marked a relatively decisive pivot point from “good” to “great” for the company. Sales were up 17%, and adjusted EBITDA grew 16% year-over-year. That’s more or less the same pace the pros are expecting through the next couple of years.
2. Analyst Consensus
While the company has been doing everything it’s supposed to do, professional stock pickers have grown increasingly worried about the slow and steady rise of IAC stock. Even as the average price target has risen to a record high of $182.23 this month, the number of analysts that are deeming InterActive Corp stock a strong buy has fallen by one since last month.
To be fair, the number of hold and sell ratings has also withered away to none, from a handful a year ago. Most of the pros are calling it a buy, which certainly isn’t a consensus opinion to be ashamed of.
It’s a two-edged sword to be sure. There’s room for more upgrades to a strong Buy, but there’s also room for downgrades. The fact that the average price target continues to rise, however, quietly says analysts are seeing the glass as half full rather than half empty.
Up 300% from its early 2016 low, IAC stock has obviously been one of the market’s most rewarding names of late.
There’s an inherent problem with such a move, though. That is, regardless of any value-based argument, a gain of that magnitude invites profit taking in a big way. Investors expecting a sizable selloff aren’t crazy for fearing one is in the works.
But that kind of thinking is tricky. Stocks can and do climb a wall of worry. As John Keynes put it, “The market can stay irrational longer than you can stay solvent.” Don’t assume InterActive Corp stock has to stop chugging along now just because of time.
Bottom Line for IAC Stock
Digital conglomerates generally haven’t worked well of late — at least not without great scale and great leadership.
Yahoo, which was eventually acquired by Verizon Communications Inc. (NYSE:VZ), comes to mind as evidence of just how difficult it is to make a buck playing the proverbial second fiddle on the internet. AOL, which eventually teamed up with Yahoo under Verizon’s umbrella, is another recognizable web name with a wobbly past.
But for whatever reason, IAC/InterActiveCorp works. In fact, it’s working better and better — becoming more and more profitable — the bigger it gets. That’s a rarity, serving as a testament to the notion that CEO Joey Levin and his team know how the web works very, very well.
That’s the long way of saying IAC stock is a stealthy buy, even at its frothy trailing P/E of 48.5 and a chart that at first glance looks a little strained. The forward-looking P/E of 20.8 is plenty palatable, and the chart’s incessant rise is evidence of healthy momentum.
Just keep it on a short leash. There really is a wave of profit taking coming sometime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.