Description

Disclaimer:

This writeup is for information purpose only, is not investment advice, and is not a recommendation, solicitation, or offer to buy or sell any security. Information contained in this document may constitute forward-looking statements or reflect the opinion of the author as of the date written. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. This material has been prepared from sources and data believed to be reliable and is subject to change without notice. No representations are made as to the accuracy or completeness of this material, and the author does not undertake any obligation to update or review any information or opinion contained herein.

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Summary and thesis:

IAC is no stranger to VIC, and we recommend the early-2020 write-up for background.

In May 2021, IAC spun-off Vimeo (NASDAQ:VMEO). Since that time, IAC is down approximately 20%. We think there are two major reasons for that decline:

1)     Post-event selling: IAC ran big starting in late-2020 as investors anticipated the VMEO spin. Post-spin, there has likely been a meaningful turnover of IAC’s shareholder base.

2)     Angi (NASDAQ:ANGI) share price decline: ANGI is IAC’s largest asset and is down 25% since the VMEO spin.

The primary points of our thesis are:

-          Valuation is now very attractive – we are paying a discounted price for IAC’s assets and those assets possess substantial upside.

o   At current levels, both ANGI and MGM Resorts (NYSE:MGM) are compelling risk/rewards.

o   IAC’s 2 largest non-traded assets – Turo and Dotdash – are together worth $2bn-$4bn+ and are underappreciated.

o   IAC owns additional non-traded assets worth $1bn-$2.5bn+.

-          IAC has near-to-medium term catalysts through an IPO of Turo and a spin of Dotdash.

-          IAC has exceptionally strong management and a culture wholly oriented around entrepreneurship and value creation, which combined with $2.9bn of cash represent huge near/medium/long-term optionality.

Material to read and thoughts on management and culture:

Before reading this write-up, we strongly recommend anyone interested in IAC familiarize themselves with the Company’s own material.

We view IAC as akin to Berkshire, where the best way to understand it has always been to read its shareholder letters and ingest any other words written or spoken by Buffett and Munger.

Same with IAC.

We think management are brilliant and aligned entrepreneurs, operators and capital allocators who know how and when to take the right type of big risks. IAC’s history of immense value creation is manifest, and it creates value in a variety of ways. IAC has turned so many assets – either developed internally or acquired when they were tiny – into enormous businesses. We fully expect they’ll keep doing that.

And management treats shareholders right. IAC is the rare – maybe the only – sum-of-the-parts story where over time shareholders have consistently realized the actual sum of its parts. IAC – in philosophy and in practice – spins off businesses to operate independently when they are sufficiently mature. They never horde to horde. It’s willing to tear itself down to size unlike any other public company we’re aware of [Melrose PLC, maybe?].

We’d start with IAC’s June 2021 Investor Presentation, 2Q21 shareholder letter, and 2Q21 conference call. Taken together, those documents are a much better version of the pitch we’ll muster. We’ll try to limit this write-up to where we’re additive.

Turo:

Turo is the largest peer-to-peer car sharing marketplace (i.e., Airbnb for cars). If you’re not familiar with the business, download the app.

Very limited financial information is available. However, from various articles and reports we believe the business is generating run-rate revenue of $300mm-$500mm and growing robustly. 2021 has been a boon as widespread rental car shortages have driven demand to Turo.

We recognize our run-rate revenue estimate is extremely wide. It’s also super hard to say what Turo is worth.

ABNB trades at >18x 2021E revenue and >15x 2022. Leading emerging marketplaces in other categories include FVRR, UPWK, ETSY, FTCH, etc. Based on comps, 10x-15x revenue appears appropriate for Turo. It is (likely) growing faster than these comps but remains smaller and earlier in its development.

If Turo can maintain its lead, a high multiple is justified. The economics of dominant, at-scale marketplaces can be extraordinary, and the businesses tend to possess large moats. Turo’s market and potential are huge.

At 10x-15x revenue, IAC’s 27% stake is worth $800mm-$2bn+.

In early August, Turo took the first formal step towards an IPO (https://www.prnewswire.com/news-releases/turo-announces-confidential-submission-of-draft-registration-statement-for-proposed-initial-public-offering-301350787.html). Accordingly, we expect the market to recognize Turo’s embedded value sooner rather than later.

DotDash:

Dotdash is a leading publisher of online specialty sites/magazines such as The Spruce, Investopedia, Serious Eats, Brides, and many others. https://www.dotdash.com/our-brands/

This business has shown extraordinarily impressive results. To quote from IAC’s 1Q21 shareholder letter: “Dotdash has compounded revenue at 33% annually over the last 3 years while achieving over 30% Adjusted EBITDA margins in 2020. As a point of reference, no company in the S&P 500 grew revenue more than 25% for each of the past 3 years while achieving over 30% margins in 2020.”

The best comp for Dotdash is publicly traded Future plc (LSE:FUTR) which trades at >20x 2021 EBITDA (>7x revenue), and >17x 2022 (5x revenue).

Based on FUTR’s multiples, Dotdash is worth >$2bn. We think that valuation is reasonable on an absolute basis, given its capital light and high margin profile, combined with very large organic and inorganic growth opportunities.

We think Dotdash is near the point at which IAC typically sets a business independent. So, an IPO over the next 12-18 months seems likely.

Taken together, Turo + Dotdash = $2.5bn-$4bn+ of swiftly growing value that will likely be made manifest over 6-18 months. ‘Stub’ IAC includes other non-traded assets worth $1bn-$2.5bn+, in addition to Turo and Dotdash, but currently trades at <$2bn.

Other non-traded assets:

Care.com

In 2019, IAC opportunistically acquired Care.com.

In addition to IAC material, we recommend the 2019 VIC write-up for background on the situation. In summary: Care was a perennially mismanaged business facing reputational issues, but which possessed a solid and modestly growing B2C marketplace business, a nice B2C payments business, and an industry leading and robustly growing B2B business.

IAC paid $500mm for Care.

Under IAC, Care’s direction has been righted and it is growing nicely on all fronts. 2Q21 revenue was $78mm vs. 2Q19 revenue of $51mm. Multiples for businesses like Care have expanded since 2019 as COVID created structural and lasting tailwinds. The combination of right direction + growth + multiple expansion means Care is worth a good deal more than the $500mm IAC paid for it.

We think Care is worth >$1bn today. It is the leading company in its space and is targeting vast and growing markets so could grow into something much larger.

Mosaic Group:

Mosaic is a leading developer of global subscription mobile applications. Popular applications in the following verticals include: Communications (RoboKiller, TapeACall), Language (iTranslate, Grammatica), Weather (Clime: NOAA Weather Radar Live, Weather Live), Business (PDF Hero, Scan Hero), Health (Daily Burn, Window - Intermittent Fasting) and Lifestyle (Blossom, Pixomatic).

Mosaic is not a great business but is also not a bad business. The business generates >$200mm of annual revenue and has been growing modestly.

We don’t know what the cash flow profile of the business is, but if run for cash we assume margins could be quite high. 1x-2.5x revenue strikes us as reasonable.

Search:

This Twitter thread does a good job explaining what the business does:    https://twitter.com/Jake_Langley/status/1406694226063073280.

IAC’s Search business is not a good business and deserves a low multiple, but it gushes cash.

On an LTM basis the business did $73mm of EBITDA. Quarterly revenue and EBITDA since 2019:

The business is somewhat controversial and at times Google has signaled intentions to make the business more difficult to operate or possibly kill it. Maybe that eventually happens.

It’s very hard to say what it’s worth, but we think the business continues to work for some time and it’ll generate a few hundred million in cash. None of that cash will be reinvested in Search, rather IAC will redeploy it to higher and better uses.

Vivian Health (formerly Nursefly):

An innovative staffing platform for healthcare workers. Small but could be huge one day.

Bluecrew:

An innovative staffing platform for blue collar workers. Small but could be huge one day.

Traded Assets – ANGI:

IAC owns 84% of publicly traded ANGI.

ANGI has been a perpetual problem child of IAC. However, ANGI is currently undergoing the most substantive and important transformation in its history.

[In addition to our comments, we recommend the previously referenced Company material, the May 2021 VIC writeup, or this Twitter thread (https://twitter.com/nsheth12/status/1381752426714128387) for overviews on ANGI’s shift from a lead generation/marketplace model to a fixed price procurement model.]

ANGI’s business model is oriented around lead generation – e.g., when a consumer types in a request for house painters, ANGI provides that lead to interested painters who are local to the consumer. ANGI is paid for the lead but is not directly involved in any resulting painting contract. This has been a successful business model, and if ANGI sticks to it, the business will likely perform well, grow nicely over time, and generate strong cash flow. In our view, ANGI’s market price assumes that outcome.

The enormous opportunity for ANGI is to transition its business model so that it is oriented around transactions, deepening its role in the market and dramatically expanding its value proposition. ANGI has been working toward this goal, envisioning a “fixed-price” marketplace for the procurement of all home services.

That transition would alter the course of ANGI’s business. For consumers, the experience of procuring home services becomes dramatically easier (e.g., 1 click procurement); for service providers, it means that ANGI is providing them much more value (i.e., a fully-baked job, with agreed scope and price, and not just a lead). The result would be greater consumer and service professional engagement, and far better unit economics for ANGI.

But the transition is fraught with obvious difficulty, and pricing home services can be complicated. One house painting job is very different from another (let alone more complex services), and costs vary wildly across different geographies.

Our view is that ANGI has a good chance of pulling it off. We believe the combination of its pole position and strong new management, supported by IAC’s financial backing and long-term orientation, give it a great shot.

But even if the transformation isn’t successful and the business muddles along, we don’t think downside is much from here. As recently as 2018, the business generated >20% EBITDA margins, implying 15x EBITDA on run-rate revenues. We believe, if milked for cash, the business could generate meaningfully higher margins.

If ANGI successfully transitions to the fixed-price model, we believe the business will be worth multiples of what it is today.

So, we think from here ANGI’s risk/reward is fantastic.

Traded Assets – MGM:

In August 2020, IAC announced that it invested $1bn in MGM stock at ≈$17/share. In a letter to IAC shareholders, management acknowledged that the MGM investment – a minority stake in a publicly traded company with minimal online presence – was aberrational for IAC. Management also laid out its investment case, which boiled down to: a) MGM was manifestly undervalued and b) MGM possesses the potential to become a leader in online gaming, and IAC will lend their expertise towards that effort.

Since IAC’s investment, MGM stock is up 150%, primarily reflecting the generally anticipated recovery in travel and leisure businesses.

MGM owns marquee physical casino assets and one of the leading online betting platforms (BetMGM). Shares trade at 12x 2022E EBITDA and 10x 2023E. Fantastic success with BetMGM or a company transforming acquisition of Entain PLC (LSE:ENT) could yield meaningful upside.

Bringing it all together:

Presented below is a summary valuation for IAC. A couple of notes:

-          The downside case assumes the downside case for everything. We think that’s too conservative. While it’s possible ANGI is a flop, it’s extremely unlikely ANGI is a flop and everything else is worth our bear case as well.

-          The valuation ascribes no value to IAC’s value creation machine. We think IAC will create billions in additional value over the next few years and none of that is reflected in the scenarios table.

Taken together, IAC represents a very compelling investment: attractive assets that are growing in value at attractive prices; and a world-class management team that has a track record of creating value and is shareholder friendly.

Catalyst

See write-up