IAC INC IAC
February 10, 2023 - 7:23pm EST by
amorfati
2023 2024
Price: 51.95 EPS 0 0
Shares Out. (in M): 89 P/E 0 0
Market Cap (in $M): 4,616 P/FCF 0 0
Net Debt (in $M): 1,100 EBIT 0 0
TEV (in $M): 5,716 TEV/EBIT 0 0

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Description

IAC Inc. (NYSE: IAC) is no novel name here. There are 9 write ups on VIC. The earliest pitch dates back to March 3, 2009, and the latest is dated Apr 5, 2022. I intend this 10th write up here to serve not as an seminal introduction, but a continuation, or periodical re-evaluation of the IAC long thesis in the present, rather precarious macro environment. In the final analysis, I propose that IAC is decent long at this level.
 
IAC Overview
IAC is a US-based holding company specializing as an owner/operator/investor of internet/websites, and media enterprises. At the helm of IAC is Internet/media billionaire investor Barry Diller, who's established an evidently positive track record in generating shareholder value via investing, developing, and reselling the many businesses with which IAC has been involved.
 
The model executed by IAC has been to acquire businesses at opportunistic pricing, hold them, and/or enhance them through development, and eventually resell them at a profitable higher pricing. The approach - helmed by Diller's leadership - has been profitable. Up until Jun 2022, 6 months before the subsequent equity market tumble, of which we are still amidst, IAC's produced 13% CAGR for shareholders, inclusive of its cash and stock distribution to shareholders since inception in the 1990s.
 
The portfolio of businesses held by IAC is constantly evolving as the company buys, develops and churns its holdings. At the current moment, IAC's portfolio is comprised of Dotdash Meredith, ANGI, Care.com, MGM Resorts, Turo, Ask Media, and a slew of nascent internet business / website enterprises folded under the "Emerging & Other" segment reported in IAC's financials.
 
To get right to the point, the SoTP table below tabulates my estimation of what each businesses are worth - based on current market pricing. 
 
Corporate Overhead Expenses
This figure for IAC is about $87 million in Adj. EBITDA for Q1 to Q3 2022, pro-rating to $87 million for FY2022. A 10% discount rate applied to run-rate equates to roughly $900 million in EV, or $10 per IAC share.
 
Cash balance
IAC balance sheet items, including cash holdings, Dotdash Meredith net debt, and non-cash working capital, total to -$3.6 per IAC share.
 
Public Holdings - ANGI
Per the most recently filings of Q3/23, IAC's publicly traded stock holdings comprise of 1) ANGI Inc. (ANGI) and 2) MGM Resorts International (MGM).
 
In ANGI, IAC owns 2,579,264 class A shares and 100% of ANGI Class B shares. 
 
Public Holdings - MGM
In MGM, IAC owns 64,723,602 common shares, roughly 17% of MGM shares outstanding.
 
The average cost basis of IAC's MGM stake is by my estimate $23.63/sh derived from MGM's disclosures as of Sep 30, 2023.
 
My implied cost basis puts IAC's MGM holding value, net of 20% capital gain tax, at $26 per IAC share.
 
IAC's ANGI stake as of Feb 10, 2023 is worth $13.81 per IAC share by my estimate. In total, ANGI + MGM holdings are worth a combined $42.79 per IAC.
 
Dotdash Meredith
Dotdash Meredith operates a portfolio of 40+ brands of digital content and printed magazines reaching an audience of 200 million+ readers who are mostly women. The business comprise of 1) IAC's legacy company called Dotdash - which consists of a collection of digital-only branded content, and 2) Meredith National Media - acquired on Dec 2, 2021 and consisting of a collection of digitally and printed magazines brands. 
 
Together, these publishers generate revenue via 1) display of advertising; 2) commission generated from advertised products sold; 3) licensing of Dotdash Meredith brands; 4) subscriptions/newsstand of printed magazines; 5) custom works for advertisers including custom publishing, marketing, search engine optimizations etc. Revenue from the digital and printed businesses are about even (45%-55%), with the printed magazines operating a lower margin and strategically sustained to maintain brand awareness for supporting the online/digital business, which is the predominant generator of bottom line. As of 2022, EBITDA from digital segment is in the mid-teens while printed magazine EBITDA is in the LSD. Because the preponderant of the bottom line is generated from digital business and roughly 2/3 of digital revenue are advertising while 20% are commission of advertised products sold, the main driver of the Dotdash Meredith business are online digital advertisements and online sales of advertised products.
 
Since its purchase of Meredith in Dec 2021, Dotdash Meredith has experienced a tough 2022. On the bottom-up, the integration of Meredith assets into the Dotdash platform has run into hiccups, causing delays to revenue ramp up previously projected at acquisition. IAC explained that the migration of Meredith publishing content/brands to Dotdash platform has been more difficult than anticipated, and technical capabilities were challenged in the execution process. This resulted in a drag on website traffic and related revenue in Q1 to Q3 2022. The company claimed on the Q3/22 earnings call that these issues are largely behind the company heading into the year end. However, it's conceivable to me that some aftereffects of integration issues would linger into 2023. Further, the company noted that traffic to its websites generally decline in the initial months after integration onto the Dotdash platform, so even for the sites that've successfully gone through integration, traffic will take several months to recover beyond levels pre-integration. On the top-down, advertising demand were weak, with rapid declines in mid 2022 from several categories including retail CPG and home. In aggregate, the double-whammy of a obstacle-ridden integration process and weak macro advertising demand resulted in a underwhelming year for Dotdash Meredith. On a pro-forma comparable basis, both digital and print revenue are down on a y/y basis for every month in 2022. Print revenue has deteriorated at a faster pace than has the digital business while negative revenue momentum for both segments accelerated throughout the year and into the year end.
 
On a forward looking basis, management expects H1/23 prospects to remain flattish on choppy and stagnant advertising demand while H2/23 to see some growth from reaping from Dotdash's post-integration efforts. It's worth highlighting here that even for the back half of 2023, management does not project a much more robust advertising market. Instead, IAC stated on Q3/22 that "Overall, we are not sanguine on the ad market, especially in the first half of the year. And so we are focused on our need in improving our sales, driving the consumption increases, and we're really in that fine-tuning mode of content, ad serving e-commerce on the Meredith sites." In essence, growth next year will have to come from the success of Dotdash's post-integration efforts, with little tailwind from an advertising environment expected to remain tough.
 
For forecast, I assume that 1) 2023 sees slightly improved EBITDA margin from efficiency gains of Meredith-Dotdash integration; 2) industry advertising demand will be weak in the first half but recover somewhat in the 2nd half. Global ad analytics firms have repeatedly revised lower 2023 outlooks. A WSJ article in Dec 2022 listed 2023 ad spend outlook from several research firms. The range for 2023 ad spend growth rate varies from 4.8% to 6.5%, down from mid-to-high single digits a few months earlier, so I'd conservatively assume digital sales topline remain flat in H1/23 per management's outlook while H2/23 sees a slight pick up of 10% from y/y 2022; 3) print revenue continues to tumble on what appears to me to be a secular decline independent of the current environment.
 
I forecast Dotdash Meredith revenue to be ~$1.96 billion for FY2022 and essentially flat for 2023. 
 
For EBITDA, I assume 2023 digital print EBITDA of 21% and print EBITDA of 6%, on par with those of FY2022. These assumptions yields to digital EBITDA of $208 million and print EBITDA of $60 million. Unallocated corporate expenses attributed to Dotdash Meredith remains at $65 million, pretty much offset by the print EBITDA, as expected by management.
 
The following illustrates the EBITDA assumptions and logic in details.
 
Over the longer term, IAC's aspirational outlook envisions the current ~20% EBITDA margin on the digital business growing to mid-30%, fuelled by the drive into e-commerce.

"We are at a point of really negative leverage, given the revenue declines. And so we've said -- we expect a marginal dollar of digital revenue to produce $0.50 to $0.60 on the dollar on EBITDA. We'd actually expect the next X amount of revenue to be at a much higher margin, given fixed cost and the nature of it. We've seen it in some of the private players, Red Ventures, others that would be comparable to certain things we're doing. But those -- we feel pretty good about getting to mid-30s margins on an EBITDA basis overall. It's hard to talk about the -- because you've also got different categories. And if we drive -- the more we drive e-commerce, the higher those margins will be."

This may be an achievable target, but I've been disappointed by enough management teams touting aspirational targets that invariably had issues materialising, so I wouldn't bank on the digital business growing to a 30% margin anytime soon, especially given current macro-headwinds weighing on revenue growth required for the said margin expansion.
 
So how does Dotdash Meredith stack up to peers? Based on the few US public comps found, I find it hard to argue for Dotdash Meredith trading at parity with NYT, because NYT has a slightly higher margin, seems to have been / are growing at a faster rate, and notably holds better + more concentrated brand name. Conversely, I'd think that Dotdash Meredith would still fetch a higher valuation than would Gannett and Lee Enterprises, which are traditional news-centric publishers that seem stale to me. So, I strike the middle ground by assigning Dotdash Meredith with multiple that is the group average that is the blended reflection of all the publishers I found.
 
At 10x 2023 EBITDA, Dotdash Meredith is worth $2.0 billion in EV or $22.6 per IAC share. Minus Dotdash Meredith net debt of $1.4 billion, equity value would be worth $600 million, or $6.6 per IAC share.
 
Turo
As of the end of Q3/22, IAC holds a 26.7% interest in Turo on a fully diluted basis in the form of preferred shares. Turo is a privately owned company providing peer-to-peer car sharing marketplace akin to what airbnb provides for real estate rentals. Per Turo's preliminary proxy filing of Dec 14, 2022, the company is currently the largest car sharing marketplace globally. As of twelve months ending Q3/22, the platform boasts 160,000 active hosts, 300k vehicles active across 10,000+ cities in Canada, UK, France, US, Australia as recent launch in Nov 2022, and 2.7+  million active guests that grew 110% y/y. The company launched in 2010.
 
IAC's cost basis associated with this ownership is approximately $275 million by my estimate, based on IAC's disclosures of purchases made in July 2019 (initial stake), Q4/20, Q1/21, and H2/21. The implied full equity of Turo at cost would be ~$1 billion in July 2019 at IAC's initial investment. At present, I estimate Turo equity fair value at $2.4 billion. This implies IAC's stake in Turo is currently worth $5.8 per IAC common share.
 
Performance over the past 3 years has been positive and appears evidently blossoming in the right direction. Net revenue has grown consecutively y/y. Even for FY2020 in which Turo competitors experienced revenue decline on a y/y basis, Turo's revenue grew. Emerging out of the worst phase economic disruptions in 2020, Turo then more than tripled revenue from 2020 to 2021. For full year 2022, revenue is set for another healthy upsurge from the previous year as YTD Q3/22 revenue has been disclosed to have grown ~70% y/y. In my opinion, the past few years of resilient topline growth momentum amidst a particularly tumultuous environment confirms the attractive prospects of the Turo business model. Meanwhile, cost margin continues to shrink on an expanding revenue base. The company became EBITDA positive in 2021 as every categories of costs (G&A, sales & marketing, product development, and Ops support) declined % of revenue. Though no guidance has been provided, I believe that as revenue continues the current growth trajectory, EBITDA margin would improve further. This expected bottom line growth thus presents as positive catalyst in addition to the topline growth.
 
Correspondingly, traffic on the site kept growing as more users engage the platform. Turo presents in the proxy two key business metrics. Days is defined as total days for a vehicle booked by guests in a given period net of cancellations. Gross Book Value is defined as the total value collected from guests for the Days booked on the platform. Both metrics have steadily improved over the past 3 years.