- IAC incurred significant write-down charges on account of the US Supreme court ruling against Aereo.
- Going forward, the Tinder monetization opportunity represents a good topline and bottom line growth potential.
- IAC valuations combined with Tinder monetization potential could present investors with a good upside over the next one year. Our IAC stock analysis re iterates our positive long term outlook on IAC stock.
IAC/InterActive corp (NASDAQ:IACI), a holding company for over 150 online brands has been among our top stock picks for close to 16 months and has netted 36.5% since its addition to our top stocks portfolio. There have been a number of events lately which we think are critical from the viewpoint of IACI investors and we update our outlook on the stock.
In Q2 2014, the company wrote-off $66.6 million with a majority of it being attributed to the shuttered Aereo TV. The US Supreme court lent a blow to Aereo asking the company to close down its operations on account of copyright violations. The write-downs led to IAC’s first loss since 2010. However, there were also decelerations in IAC’s other businesses which impacted overall revenue growth in Q2.
Q2 IAC segmental performance summarized
The company saw a slowdown in its biggest revenue segment, search and Applications. Search and applications posted a 7.4% decrease in revenue to $395.7 million while segment operating income fell 13% to $77.8 million. The Match segment, the second largest revenue contributor, posted revenue of $214.3 million, up 8.2% from a year earlier, while its operating income grew 15% to $61.2 million.
The media segment reported revenue of $36.7 million, a 36% YoY decline. Also worrying was the huge increase in the segment’s operating loss, which widened to $9.8 million from $2 million in Q2 2013.
At a consolidated level, the company reported a loss of 22 cents a share, down from 67 cents a year ago while revenue saw a 5.4% YoY decline. The Q2 2014 results failed to deliver on topline growth as well as bottomline. However, an interesting comment from the CC was the possible monetization of Tinder, the fast growing dating app.
Tinder monetization could be a key value driver
Growth in users, engagement level and monetization strategy are the three levers to drive topline growth in any online business. Tinder has become a popular product given its rapid growth rate, something which isn’t going to slow down anytime soon. So why is Tinder so popular?? Why has it caught on like wildfire?
A post on wired.com addressed the above questions saying Tinder has solved the problem of dating sites by removing the fear of rejection. Also it has cut down the effort required to get on the platform. These two facts have largely been seen as the strong selling points of Tinder.
Apart from becoming a popular product, Tinder has also become a sticky product given the time spent on the platform by an average user. The engagement on the platform is definitely on the higher side. The time spent on Tinder by the average user, at 60 minutes is 50% higher than the 40 minutes average time spent on Facebook.
The third lever of user base monetization is scheduled to begin this year. Gregg Blatt, chairman of Match group said in the Q2 2014 CC, “we plan to start to monetize Tinder this year.” The management also expects to generate $75 additional EBITDA this year from monetization of Tinder, another fact quoted on the Q2 2014 CC. The company reported $545 million of EBITDA in 2013. The additional $75 million of EBITDA could lead to a 14% increase in EBITDA solely from Tinder. The monetization of Tinder could therefore help revive growth in the match segment of IAC.
IAC valuation and conclusion
IAC currently trades at a PE ratio of 31.32 and a price-to-sales multiple of 1.92. Adjusting for the one-time losses, the company trades at a PE ratio of 23.28, which is extremely attractive multiple for IAC in the internet space.
The forward PE ratio of 20.4 and price/earnings to growth ratio (PEG) of 1.3 make this an extremely attractive investment in the internet space. IAC valuations combined with the potential monetization opportunity of Tinder presents investors with a good investment option.
We continue to re-iterate our positive long term outlook on IAC, which is also reflected in our current IAC stock analysis.