IAC Earnings: Is the Internet Conglomerate a Buy?

I wish I had enough money to buy every stock that looks good to me. That way, I would have done very well over the past 20 years that I’ve been an investor.iac-internet

There’s some consolation in taking pride on good calls for readers, offset by the (fortunately rare) mea culpa when some stock implodes despite all my hard work and good faith due diligence.

So I would have made more than three times my money had I invested in IAC/InterActiveCorp (NASDAQ: IACI) five years ago. My struggle with Barry Diller’s terrific conglomerate of e-commerce businesses was always how to value it. It doesn’t really conform to traditional methods of valuation like P/E ratios.

That’s because there are so many adjustments to how net income gets calculated. There are accounting obstacles because of the equity methods involved. There are constant experiments going on within each division about how best to get consumers to interact. That means expenses vary from quarter to quarter.

At its core, IAC is about cash flow, just as it is with John Malone’s constantly-changing suite of stocks for Liberty Media Corporation (NASDAQ: LMCA). Even valuing it on an EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization) ratio is challenging, because you can really only compare it to its historical range. Even then, a range becomes irrelevant if IAC goes through a boom time.

Then the ratio may exceed its historic range, yet still represent a long-term value. These companies are as difficult to value as micro-caps that have just started generating revenue and appear to have a great future ahead. Ultimately, with IAC you are betting that Barry Diller and his team purchase the best online brands, that execution continues at these websites, and that people continue using e-commerce.

Tuesday’s IAC earnings release shows that the company continues doing most or all of the above.

Being single is not something most people like, so IAC has a perpetual revenue source in Match.com, Tinder and all their affiliates. Paid member count was up 5%, and revenue was up 19%, before accounting for foreign currency effects. Cash flow was down, as expected, due to the ramp-up of Tinder Plus and The Princeton Review.

The Search and Applications division is growing. This includes the brands Ask.com, Dictionary.com and About.com. The value of these brands is determined by how much advertisers are willing to pay to be seen on those pages. Considering that Dictionary.com saw a 20% increase in ad value and About.com saw a 40% increase in total display ad revenue, these brands are clearly well-positioned.

Management stated that it expects this division to generate over $300 million of cash flow this year, with the second quarter down in the high single-digits sequentially from Q1.

HomeAdvisor has proven to be a great acquisition. Q1 saw 24% revenue growth, and the U.S. side of the business grew 34%. It’s a great example of what can be accomplished with a solid base of credible professionals.

Vimeo has augmented its user-generated content by adding 20,000 titles for on-demand streaming. It has also acquired more products for its video-on-demand platform.

Overall, IAC revenue grew revenues from $740 million to $772 million. Adjusted EBITDA fell from $108 million to $75 million. Operating income fell from $71.7 million to $35.1 million. Remember, though, investors are really just banking on the factors mentioned earlier.

So do you buy the stock at its current price? My opinion is that I don’t see red flags as far as execution. I see each division trying different things to enhance the user experience and reach. Every division generates strong revenue.

Until something changes at these levels, I think you buy in, but only if you are willing to hold for the long term.

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Published by Wyatt Investment Research at