IAC/InterActiveCorp: Adding Meredith To IAC - The Tech Version Of Berkshire Hathaway

Nov. 17, 2021 8:15 AM ETIAC/InterActiveCorp (IAC)VMEO, ANGI1 Comment7 Likes
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Summary

  • ANGI’s acquisition strategy gave an interesting insight into the company’s future plans.
  • Dotdash & Meredith’s respective strengths will allow the newly combined company to capture several low hanging-fruits.
  • Some of IAC’s businesses have quality concerns (e.g. bad customer reviews) which management has to sort out before scaling.
  • The assessed value of one IAC share is $178, representing an upside of at least 32%.

digital marketing concept, online advertisement

anyaberkut/iStock via Getty Images

This article is contributed by Douglas of Superstocks Seekers team.

Brief History

IAC (IAC) is an Internet company, focused on acquiring, developing and distributing online businesses. The company has successfully scaled several of its businesses, and spun them off as individual companies. Some of the notable ones are Expedia (EXPE), Match Group (MTCH), and most recently Vimeo (VMEO).

IAC Timeline - started as Silver King in 1995

Source: IAC Jun'21 Investor Presentation

Tapping on its success in running those spun-off companies, IAC never stops looking to acquire and/or develop new digital businesses after each spinoff. Interestingly, there seems to be a preference for digital marketplaces platform companies.

ANGI

Angi (ANGI) is an online marketplace platform connecting consumers to home service professionals ("SPs"), offering services such as cleaning, repairing, landscaping. We gave a breakdown of Angi in a previous article.

IAC owns 422 million shares of Angi, which is equivalent to 4.75 Angi shares per IAC share.

ANGI's Earnings Update for Q3 2021

The company reported a Quarter-on-Quarter increase of 160% for its Angi Services segment, while a slight decline for Leads & Ads. Part of the increase was contributed by the acquisition of Total Home Roofing in Jul'21. Angi's CEO Oisin Hanrahan addressed the declining trend of transacting SPs as a result of supply constraints in the earnings call. The huge increase in the Services segment despite such constraints shows the strong demand from consumers for home services. It also means that they're served by a concentrated pool of SPs, which results in higher profitability for those SPs.

In addition, bolt-on acquisitions to different categories (similar to that of Total Home Roofing) will be actively looked at. This is an interesting strategy as it will be a shift away from an asset-light marketplace model where Angi only acts as a broker between consumers and SPs. Owning the supply base allows them to have better control over SPs quality and the company's profitability while increasing its supply base. And Angi is able to leverage its experiences to determine which are the high-demand categories that justify an acquisition. On the other hand, it will add on operating costs to the company, dragging down its profits if demand wavers off. The effectiveness of such acquisitions will be something to monitor. If this works out well, Angi will be able to strengthen its competitive position.

Dotdash + Meredith

Business Overview

Dotdash is a portfolio of digital publishing brands, creating domain-specific content for readers. They focus on intent-driven audiences, which means that their content provides answers to people's questions. This is different from providing news, sports/entertainment updates where it's simply reaching out to general audiences with no clue on whether they value the content. Dotdash announced the acquisition of one of their competitor, Meredith Corporation (MDP) in Oct'21. This all-cash acquisition will allow the company to have access to Meredith's brands and larger audience base, while not being dilutive to existing shareholders.

Dotdash Meredith

Source: Oct'21 Investor Presentation

Business Model

Dotdash earns revenue through two avenues, display advertising & performance marketing. Display advertising is selling advertisement spaces on their sites. Performance marketing revenue includes performance marketing commissions and affiliate commerce commissions. These commissions are earned when readers clicked on affiliate links (Cost-per-click), with more earned if a transaction is completed from that initial click.

The company prides its content on the below 3 factors:

1. Premium quality unbiased content. As mentioned above, the content on Dotdash's sites is intent-driven. They aimed to provide answers when people need to make decisions or take action (E.g. Which brokerage accounts to use?). The contents were created after comprehensive reviewing and/or testing by their staff, be it health, food recipes, or technology gadgets. This is especially prevalent in Verywell health, where the article can be written by one healthcare professional and reviewed by another. There's even an updated timestamp if the information is time-sensitive.

Verywell Health

Source: Verywell Health

Furthermore, IAC CEO Joseph Levin mentioned in Q1'21 earnings call that their content is not driven by monetization, even though they receive performance marketing commissions. It is purely aimed at helping readers make the best decision. This is an editorial edge over digital content providers posting sponsored articles, where the content will definitely be skewed to the sponsor's benefit. Having unbiased content will acquire readers' trust, which in turn facilitates transactions from recommendations.

2. Fewer Ads. Despite having their revenue source from ads, Dotdash chose to have fewer ads as compared to their competitors since it is more reader-friendly. Also, Dotdash brands don't do any pre-rolls or pop-ups ads as it's attritive to readers.

According to Dotdash CEO Neil Vogel in a Sept'21 Citi Global Tech Conference:

Yes, I don't think - it's funny, we don't look at monetizing through ad load because that's sort of like - that's like a fool's gold approach to the Internet. What happens when you have too many ads is users don't stay for nearly as long. They don't come back nearly as much. And those ads end up being less valuable because there's too many of them, and people just don't interact with them.

Their intent-based content allows their ads to be extremely high-valued, as they know the readers' intention of reading the article. This leads to higher chances of transactions, which is the ultimate aim for advertisers. This can be seen in the increased revenue for the past year. Furthermore, there isn't any churn from the top 25 advertisers every year. In fact, the same advertisers are spending more in 2021 as mentioned by CEO Levin in Q3'21, with a "Net revenue retention" of 129%. All the above shows tremendous ad demand for Dotdash brands, creating untapped pricing power for the company.

Dotdash revenue

Source: IAC Q3'21 Metrics

3. Faster Sites. Having fewer ads on the page also contributes to creating a faster loading site. The below comparison with a Meredith brand shows the huge difference. Although not explicitly shown, a reader will always prefer a faster loading site (provided that the content is relevant).

Average page speed mobile

Source: IAC Q3'21 Shareholder Letter

Meredith Acquisition

The acquisition allows both companies to tap on each other's strengths. Meredith, being a 100-year old company, has larger audiences and better relationships with advertisers. According to CEO Vogel during the post-acquisition call, Meredith is able to generate more revenue per ad for each visit. Thus, this experience will help Dotdash in negotiating better deals with its advertisers. On the other hand, Dotdash, being digitally native, is better at converting readers into buyers, driving more transactions. Dotdash is already achieving it without collecting any data from readers or tracking cookies. This playbook, coupled with the massive 1st party data previously collected on Meredith's end, will unlock significant leverage for the combined company during performance marketing negotiations.

Dotdash Meredith acquisition

Source: Acquisition Presentation

Even though both companies have multiple brands within the same verticals, the respective brands serve different audiences. This in turn exposes each brand to a larger audience base, increasing Dotdash Meredith's appeal to advertisers. CEO Vogel stated during Q3'21 earnings,

"But the people we sell to there is surprisingly little overlap. Like there is a lot less overlap than one would expect. We do very well in sort of endemic pharma and endemic finance. And we do okay in lifestyle, they do tremendously well in lifestyle, and don't really play as much in some of the areas in which we play. So it's all very complimentary, complimentary audiences, complimentary advertising partners, even the way we do commerce is different."

Tailwind: Google 3rd-Party Cookies Ban & Apple stopping IDFA

Privacy concerns have led Google (GOOGL) & Apple (AAPL) to stop selling 3rd party data to advertisers within the next few years. As a result, advertisers who relied on them to send targeted ads will be adversely impacted.

These measures played right into Dotdash Meredith's hands, increasing the demand for their ad spaces. The company's stand on selling ads based on their intent-based content does not require any tracking of users' activities to be effective. Furthermore, the traffic to their sites is 100% organic since it's the best answer Google can provide, according to CEO Vogel during 2020 Business Leaders' Call. By searching "What color to paint a kid's room", the company already knows what a reader is trying to achieve. Ads can then be targeted based on the topic (which can be painting jobs, paints, renovation, etc., for the above example).

Search

IAC's Search segment consists of 2 components: Ask Media Group & Desktop Applications developed by Ask Applications (formerly known as Mindspark Interactive Network).

Ask Media Group

The group provides search services and a variety of content sites. Similar to Dotdash, they generate revenue through paid advertisement listings in response to search queries and those on their websites, with a small extent from affiliate commerce commissions.

Ask Media Group

Source: Askmediagroup.com

The difference from Dotdash is that there's a heavy reliance on Google. Google supplies a majority of the paid listings on Ask.com search results. So when a user accesses the link, the advertiser pays Google, and Google shares a portion of the revenue with Ask Group. For the organic search results, it is concerning that the results are not up-to-date and not very relevant.

Results from Ask Media Group

Source: Top 4 organic search results for "iPhone 13" on ask.com

There seems to be an inherent risk with that approach. Even if ask.com is just serving a very small user base, there should be at least quality results originating from its search engine to garner trust, which in turn retains users. In the event where Google chooses to end this partnership, this website will lose the majority of its revenue. To make things worse, with minimal users, advertisers would not be willing to spend marketing dollars on ask.com.

Ask Media Group site visitsSource: Created by the author with results from Similarweb.com

Next, a dive into some of their sites' content depicts a different stand from those of Dotdash. These sites thrive on content ranging from pop culture, history, interesting people & stories to basically anything that is trending. The wide-ranging nature of such content appears to be a hedge on Dotdash, while also serving as a home for brands not suitable for Dotdash's culture. The effectiveness of such differentiated approach is seen from the tripling of Non-Google advertising revenue from 2018 to 2020, while still enjoying revenue growth in Dotdash. However, we are concerned that once the above mentioned 3rd party data measures kicked in, Search's revenue might be impacted.

Dotdash and Search revenues

Source: IAC 2020 10-K Filing

Desktop Applications

The Desktop business develops desktop browser applications that aims to make lives easier for consumers. Some of their applications include FromDocToPDF & MapsGalaxy, distributed primarily through Chrome Web Store. The business also earns majority of its revenue from displaying paid listings from Google, with a small extent from applications' subscription fees.

Performing a google search on the 2 apps shows an alarming sight. The search results are filled with links showing the removal of the apps. Even the links (FromDoctoPDF, MapsGalaxy) look outdated and filled with advertisements. There's not much information online about the other apps that the company developed other than this site. The results also show a concerning picture.

Source: shouldiremoveit.com

Thus, it is of no surprise that Desktop's revenue has been declining rapidly over the years.

IAC Search revenue

Source: IAC Q3'21 Metrics

Emerging

Care.com

Care.com is an online marketplace connecting families to caregivers, for services such as childcare, senior care, tutoring, and even housekeeping. The company also offers a Care@Work corporate benefits program, which allows employers to provide Care.com benefits to its employees. Depending on the employers' preference, they may choose to subsidize all or a portion of the cost for employees when they utilize Care's services.

The company earns revenue through premium membership subscription fees from both families & caregivers, and Care@Work annual contracts with corporate employers. During Q3'21 earnings, CEO Levin mentioned that improvements are constantly being made to the business which led to subscribers being up 30%.

However, the reviews do not portray such a rosy picture. Looking at the 1-star reviews (which took up 76%!), there seems to be a non-existent customer service team. There were multiple cases of overcharging membership fees when families only signed up for a one-month membership. This is exacerbated by the limited features of a free membership, where families aren't able to communicate with the caregivers and assess their suitability. Caregiving is an intimate job. Hence, adequate communication is usually required to build up certain levels of trust. This inevitably resulted in many feeling they are being forced to sign up for premium.

Care.com

Source: Trustpilot reviews

Similar to our concerns with Angi SPs, all these complications will only push families to go directly after the first satisfied job. Furthermore, with the company unable to effectively remove bad actors (caregivers who don't respond or even cancel jobs at the last minute), there will be issues with customer retention. These are signs of a dysfunctional marketplace.

Mosaic Group

Mosaic Group develops and provides mobile applications globally. The group's revenue comes from in-app purchases and display advertisements. Unlike its desktop counterpart, the mobile apps are highly rated, with Clime even ranking top 5 in its category consistently.

App Name

Category Ranking

Ratings (Out of 5 Stars)

iTranslate

26th (Productivity)

Almost 5

Clime: NOAA Weather Radar Live

2nd (Weather)

4.5

RoboKiller

39th (Utilities)

4.5

Productive - Habit Tracker

81st (Productivity)

Almost 5

Scan Hero: PDF Scanner

129th (Business)

Almost 5

Daily Burn

469th (Fitness)

Almost 5

Source: Created by author with Apple App Store results from SensorTower

Vivian Health & Bluecrew

The 2 companies serve as a digital labor marketplace for healthcare professionals & hourly jobs workers respectively. Vivian Health focuses on travel & per diem nursing jobs, while Bluecrew offers jobs ranging from warehousing, light industrial to event staff & F&B. Both platforms aim to eliminate the inefficiencies of interview processes, which are time-consuming and cash burning. The urgent, and sometimes short-term nature of these jobs makes these inefficiencies more problematic for employers. Therefore, both platforms are trying to fill this gap by performing their own background checks for job-seekers before matching them to jobs.

Minority Investments

MGM

IAC purchased a 12% interest in MGM Resorts International (MGM) during 2020. Readers can refer to the Q2'20 Shareholder letter to understand the company's rationale behind the investment. In short, IAC was banking on the edge that MGM has in expanding into online gaming with its physical casinos. US regulations require online sports betting and gaming operators to partner with a local casino operator, probably to address liquidity issues. Tapping on its experience in driving off-line to online conversions, IAC hopes to assist in scaling BetMGM, MGM online gaming arm, with revenues close to 0 at that point of time. And to a lesser extent, IAC was capitalizing on the low price placed on MGM during COVID.

CEO Levin stated during a Sep'21 Goldman Sachs Conference, BetMGM is already gaining traction in several states, which was faster than what he expected. At 15th Nov share price of $45, IAC has made more than 2x returns from their $19 cost basis.

Turo

IAC made a $250million investment into this private company in 2019. Turo is yet another digital marketplace, providing peer-to-peer car sharing. With a platform similar to Airbnb (ABNB), they earn revenue through charging a percentage of the booking fee to both car owners and consumers, also known as the "take rate". The company aimed to help car owners monetize their otherwise idle cars by renting out. Also, it provides a localized supply base and larger varieties for consumers selection as compared to traditional B2C car rental companies like Avis (CAR). Turo has over 450,000 car listings and over 850 models spanning over the US, Canada & the UK.

Demand for car rentals has heated up recently due to pent-up travel demand from COVID lockdowns previously. With traditional rental companies not having the fleet size to meet all the demand, it has benefited Turo. It certainly helps when user reviews and app ratings are showing good things about the company. When compared to its main competitor, GetAround, the popularity of Turo seems to be way ahead.

Turo vs Getaround

Source: Google Trends

Valuation

As of 15 Nov 2021, the market valued the enterprise value ("EV") of the stubs (all the IAC companies excluding Angi) at $7.1 billion.

Angi valuation

Source: Author's estimates

Using the trailing twelve months ("TTM") revenue of just Dotdash Meredith & Search businesses, we estimated an implied EV of $11billion.

Dotdash Meredith & Search businesses

IAC Search revenue

Source: Author's estimates

Since Dotdash was able to achieve a 25% Earnings-before-Interest-&-Tax ("EBIT") margin, we feel that it's a reasonable target for the combined company once the playbook is effectively implemented in the near term. Furthermore, a Net Retention Rate of 125% with almost zero churns ensures that revenue will be increasing yearly. This is akin to the recurring revenues of a growing SaaS company offering subscription services, such as CrowdStrike (CRWD). Thus, we feel that an 18x multiple applied on the combined business is a conservative target. Readers do have to note that this margin won't necessarily be achieved in the next year, as the management has already stated 2022 to be a transition year.

On the other hand, we are not as optimistic about the Search business. Even though revenue has experienced a more than 40% QoQ growth for the recent 2 quarters, we do not envision this growth rate to continue. The possible headwind of 3rd party data measures might impact the whole business. Thus, we are only applying a conservative 8x multiple.

Dotdash Meredith valuation

Source: Author's estimates

We worked out an intrinsic value of an IAC share to be $178. As of 15 Nov 2021 closing price of $134, there is an immediate upside of at least 32%. This value also provides a margin of safety since the remaining businesses and minority investments are not being considered yet.

Conclusion

IAC management has a good track record of developing and scaling businesses. Even though some of its businesses have quality concerns, we have trust in the management to iron it out before scaling them. Otherwise, those concerns might become the elephant in the room and impede the ultimate aim of widespread adoption. We are basing it on IAC's experience in digital platforms from Expedia & Tinder, which should help in effectively monetizing its marketplaces' services while still creating a win-win situation for both supply and demand sides.

For now, the Meredith acquisition has placed Dotdash in the spotlight. The low-hanging fruits that are available (improving ad loads & sites' speed and driving better ad deals) highlight the symbiotic nature of the acquisition, and provide a good base for Dotdash Meredith to continue growing in the future. We believe Dotdash Meredith to be the main value creator for IAC in the near term.

This article was written by

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Disclosure: I/we have a beneficial long position in the shares of IAC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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