Published on the Value Lab 28/10/22
IAC (NASDAQ:IAC) is a company that has been buying and selling interests in major internet media company for years. The pedigree of its track record is that of a top-tier VC. The only difference is that a lot of the businesses it buys it also operates and are later stage than typical VC, such as with the properties that eventually became Expedia (EXPE) after it was spun off, as well as the Vimeo (VMEO) property which also now exists as its own entity as of last year. In both its history but also its current strategy, companies with valuable network economics have been the targets, which makes the current IAC valuation all the more easy to overcome with high order compounding growth.
We believe that IAC is a very strong buy for the investor who doesn’t believe that capital markets have become fundamentally ruined forever (IAC does ultimately rely on markets to realise the value of their progressive portfolio) but it also offers downside protection in case the venture space never looks the same as it did these last decades again – which would be a pessimistic assumption. The reason is that much of IAC’s current valuation can be explained by non-operating positions it has in solid, profitable and mature stocks, as well as other companies which have stock market valuations that still shore up the current valuation despite heavy discounts in tech and media stocks. With a certain valuation guaranteed by major ownership in some publicly listed equities, including MGM Resorts (MGM), the upside comes from the non-public holdings, i.e., the venture portfolio of media internet stocks, some more profitable than others, but all growing quickly. Even with very conservative valuations for all of them, including valuing some at the cost of when they were acquired by IAC, an almost 2x upside could be estimated from the current IAC price which has come down very substantially upon the discounting of tech stocks.
While there could be some volatility ahead, we are beginning to worry about peak inflation coming while we’re still rather on the sidelines. As opposed to most tech companies that would require hope that tech valuations return to normal, which they may not if interest rates go higher and stay high for a long period of time, there is a high degree of downside protection with IAC in more definitely valued exposures in public markets that have already been discounted by the market rout and account for most of the current valuation. The mitigation of speculative elements in this stock, as well as the exceptionally low cash burn for a VC style exposure, makes IAC a high conviction buy.
The Breakdown of IAC
Let’s start with a discussion of IAC’s holdings which trade on public markets and are therefore given valued determined by public markets rather than our own, more subjective determinations.
Public Holdings
The holdings that currently trade publicly are one operating and the other non-operating.
Angi Inc.
The operating holding is Angi (ANGI) once called Angie’s List, of which IAC has an 85% economic interest, and an almost 100% voting interest.
At December 31, 2021, IAC held all Class B shares of Angi Inc., which represent 84.5% of the economic interest and 98.2% of the voting interest of the Company.
The current market cap of Angi is just above $1 billion, and we scale down the market value of the Angi ownership of IAC by the 85% factor giving us a $889 million valuation.
What does Angi do? It has two websites, Angie’s List and Homeadvisor that are marketplaces/directories for people to find home service professionals, people like remodelers, cleaners and landscapers. The company makes money in two ways. The first is that it sells its own priced services directly to the consumers and then uses one of the home service people from the platform to conduct the service, obviously charging higher than the cost of engaging the professional(s) which goes into COGS. The other way they make money is by charging home service professionals and businesses to be present on their directory, effectively being an advertising medium for them to generate business. They have both a directory and automated matching system and they charge for these leads or the ad space on their platform. Angi also provides service professionals tools for invoicing, quoting and a suite of other things for individuals to be able to run their business substantially on their platform. There’s also a membership tier that creates subscription revenue from both the consumer and the home service professionals side which gives access to savings and is beneficial to anyone buying or selling at a larger scale.
Ultimately this is a business with demand side economics that makes fee income upon matching customers with home service professionals, making money primarily charging the affiliated home service professionals primarily for the lead generation (50% of revenue), and hosting ads for businesses on the website (16% of revenue). The rest is mostly (20%) the selling of subcontracted home services that are billed directly to Angi, or the provision of Roofing services that Angi does comprehensively in house. Overall, the selling of subcontracted services has seen a doubling in revenue (roofing has been on the decline however), but it has introduced gross margin compression into the business due to higher labour and material costs and a larger portion of the sales being material intensive. Still, the majority is a pretty lovely platform economics business, and has grown phenomenally with all the home improvement people have been up to during the pandemic and still now despite macro pressure. Macro will put more pressure on this company’s growth prospects over the next year as the recession takes hold, but the markets have already shown their ire with substantial YTD selling with forecasts still showing growth, so we are happy with the current market cap as a conservative baseline where it trades at 0.67x sales, which is probably low considering companies like Udemy (UDMY) with similar platform economics trade at 2.4x sales, more than 4x the multiple. Angi could probably be more expensive than it is to be fairly valued.
We should also mention that Angi is operating cash flow positive even as they have grown the services revenue in their mix which increases working capital burden and compresses some of the gross margin. Therefore, there is no reflexivity risk. From a historical price analysis, the fact that the declines in Angi mirror that of a pre-revenue deSPAC, the lack of reflexivity from stock prices mattering for financial conditions doesn’t seem to be taken into consideration. We also note that there is a deceleration in the ad and lead-based earnings for Angi, growing about 10% this quarter YoY, with last year seeing about 17% YoY growth. This deceleration is consistent with what we’re seeing in the latest ad-based tech revenues too from the current earnings season. This deceleration is certainly part of the large discount being taken on the company, although we note that Angi is managing to create new lines of business to accelerate growth overall, outside of just the ads and leads-based businesses.
MGM Resorts
The other publicly traded holding is MGM Resorts. Unlike Angi this is of course not a controlling stake and they have enough ownership, 16.5%, in order for them to account for it as an equity-accounted holdings. It is accounted for separately than the other marketable securities.
We have a more updated market cap at around $2.1 billion for their stake. Could that hold? We cover MGM and in our last article we discuss that MGM is in the process of going asset lite, and selling its super valuable properties, like the Bellagio that it once owned, to real estate investors who they will then pay rent to as operators. There’s still a lot of hard assets in this business, and the calming down of the reaction to COVID-19 is a good thing for gaming. In particular we also pointed out that unlike some of the other operators on the Strip, MGM also had a pretty large regional gaming portfolio, where regulation and general economics tend to be better from a cash flow perspective and the perspective of recurring revenue. There is less dependence on tourism and corporate convention revenue.
The big catalyst for MGM is BetMGM which is the online betting platform it launched with Entain (OTCPK:GMVHF). This is a J.V at the moment that is still unprofitable but is dominating the open sea of the legalising online betting landscape in the US. When it scales it could add 20% to the EBITDA of MGM, so a really big mover. We think the chances this bears fruit as expected are quite high since no one else managed to move into this market at the same scale of BetMGM as the different states legalise and regulate online betting. We cover Betsson (OTC:BTSBF) on the Value Lab which is a formidable competitor and they haven’t been able to get commercialised yet.
China is a much smaller part of MGM compared to the other Strip players which a good thing considering how tough operating in Macau has become. With smaller China exposure, good amount of regional gaming exposure, and a good catalyst with BetMGM, things honestly look pretty good for MGM at a 7.4x forward PE and a relatively resilient portfolio. We’re pretty confident we can put the $2.1 billion they’re worth in our SoTP valuation later without that value tanking too much from here.
Non-Public Holdings – The VC-like Portfolio
We’ve discussed in detail the public holdings which should either be resilient or have already been substantially discounted and can have their market values comfortable used in the SoTP. Let’s discuss Dotdash Meredith which is 100% controlled and their main and profitable consolidated…
Read More: IAC’s Many Platform Businesses Add Up To A 65% Conservative Upside (NASDAQ:IAC)