The conglomerate has scooped up many of the best names in e-commerce.
If you are going to buy stock in a company, you obviously want good management. However, you can do better than just “good”. You can, in a few cases, get “visionary”. We all know about Warren Buffett. We all know about Apple‘s (NADAQ:AAPL) Steve Jobs. Liberty Media’s (NASDAQ:LMCA) John Malone is not a name most investors are familiar with, but should be, since he basically invented the cable TV business and is perhaps the world’s greatest dealmaker.
In the case of IAC/Interactive (NASDAQ:IACI), there’s Barry Diller. He is a media mogul with 45 years of experience, who has bought and sold some of the world’s most famous businesses, and who has always been three steps ahead of anyone else in media. Diller saw the potential of the internet way before other people, saw that while E-commerce is a tricky thing, the core of it is no different than other businesses, namely cash flow.
For any internet business, to be truly successful, you have to be a first mover, have capital to advertise, and a high-quality product and brand. Once you get cash flow positive, capex will decline and cash flow should explode.
Diller excels at finding well-run businesses that own a given space because of the strength of their brands. In addition, he finds brands that may not even generate e-commerce revenue but have significant advertising revenues, or search functions that can leverage other e-commerce.
IACI Stock: Looking Deeper
IAC’s Search segment provides search, reference, and content services through its destination search offerings, such as Ask.com and Dictionary.com, and aggregates local advertising and content for distribution to Web and mobile publishers. This segment derives its revenue from advertising, which it can only do because the websites IACI purchased had a lot of traffic, which advertisers like. Diller than expands each brand.
Its Match segment provides online-personals services, including Match.com, Chemistry.com, and OKCupid.com. This is primarily subscription-driven revenue. Dating websites are cash cows because there’s no shortage on lonely hearts (sigh). There’s also some residual advertising revenue since sites like OKCupid have both free and subscription level services.
The ServiceMagic segment offers Market Match service, which matches consumers with service professionals. This grew out of IACI’s purchase of ServiceMaster, a public company whose EPS had flatlined but continued to generate fantastic cash flow.
So, yes, cash flow is what Diller and Malone are all about. IACI generates tons of free cash flow, to the tune of $300 million annually, like clockwork.
I believe IAC is a buy. It is difficult to value these kinds of businesses because they are all about the cash flow. For that, we look to the EV-EBITDA ratio.
For IACI stock, its 10.89. LINTA trades at 9.28, so its not terribly different. I also do not think that having both Liberty Interactive and IAC creates overlap. They complement each other very well in covering all aspects of Internet commerce.
With other Internet brand names either obsolete, such as EBay (NASDAQ:EBAY), it’s a much better move to jump on Diller’s train. As both a growth and value play, IAC stock fills two categories at once.
Lawrence Meyers owns shares of AAPL.
How the iPhone 6 unveiling impacts mobile
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