- IACI management has put in a steep target for the dating business with a FY 2016 segmental EBITDA of $500 million
- Usage on dating sites is rapidly rising with MAU’s increasing 60% YoY in Q2 2014.
- Stabilization of app revenues and improvements in dating monetization could lead to huge upside in IACI stock.
Interactive corp (NASDAQ:IACI), an internet conglomerate with a collection of over 150 web properties has been among our top stock picks for over a year now. The stock has returned close to 16% since its addition to our top stock picks. However, the stock has declined 14.5% in the year to date, compared to gains of 1.2% and 1.5% in the S&P 500 and NASDAQ composite, respectively.
Source: Google Finance
The decline could raise questions in the minds of investors which are addressed in our post today. To get an accurate long term outlook on the stock it is important to look at the performance over the last few quarters and the management commentary in the preceding conference calls.
IACI Operating Segments
Interactive corp classifies its operations into 4 major segments: Search and Applications, The match group, Media and e-commerce (formerly local and other). The segmental contribution to last twelve month (LTM) revenue is displayed in the chart below
IACI Revenue by Segments
IACI Revenue Growth
IACI topline has declined in 3 of the last 4 quarters, with a YoY decline of 1.5% in the LTM revenue. The segmental revenue growth is displayed in the chart below.
IACI Revenue Growth
The match segment is the only segment with consistent topline growth and is clearly the growth engine of the IAC group.
IACI Segmental Profits
The management actively tracks adjusted EBITDA as a measure of the company’s performance. We take a look at the segmental performance on this metric.
IACI EBITDA Margins by Segments
The Match segment once again comes out as the top performing segment on this metric followed by the Search and Applications segment. The two segments among them contribute close to 100% of the group’s profits, and offset losses from other segments in most quarters. To get a long term outlook on the company’s future performance, it would be ideal for investors to focus on the performance of these two segments.
'Search and Applications' Hit by Google Chrome Transitions
According to Joey Levin, CEO of IAC Search and Applications, the applications segment has seen revenue declines largely due to a transition in Chrome browser. However, the applications revenue will stabilize as the company has already worked out ways to monetize in the newer versions of chrome.
Quoting from IAC Q2 2014 conference call:
For Search & Applications overall, we anticipate EBITDA margins for the remainder of the year, similar to Q1 given the expected revenue declines in the applications business. I don’t believe there is any company better equipped to handle these transitions than us. And we’ve already found avenues for optimization to improve performance in the new Chrome, while continuing to generate meaningful cash flow. At the same time, our portfolio of content properties, comprising our websites revenue continues to grow and diversify. We’re excited to keep on building.
The search and applications revenue will be closed watched in Q3 and Q4 for any signs of stabilization, which is extremely critical for reviving topline growth at the company.
The Match Segment Usage and Monetization
The management has set out a long term target of $500 million EBITDA from the segment in FY 2016. This implies a 23% YoY growth in EBITDA from FY 2013 to 2016. The company saw a 60% YoY growth in MAU’s in its dating business in Q2 2014. This is definitely a positive sign as usage metrics are a precursor to monetization. On the monetization front, the company has set a target of doubling the monetization rate over three years from 2013 to 2016.
According to Grég Blatt, Chairman of IAC the Match Group;
In our non Tinder businesses monetization is already up about 30%, way ahead of schedule. And we plan to start to monetize Tinder this year. So, we’re confident in the contribution from this bucket. The second piece of our older business is which we said needed to keep growing at historical rates. Those are lagging slightly behind in 2014 but we’re confident they’ll improve.
The dating business, clearly the most attractive of IACI’s operating segments could see further increase in topline growth, boosted by monetization of Tinder, the fast growing dating app.
IACI Analyst Consensus
Analysts see a revival of earnings growth in FY 2015, once the applications business overcomes its chrome problems and the monetization of Tinder and other new dating properties begin to achieve greater contribution to topline. The current consensus estimate is FY 2015 EPS of $3.70 which will be 72% higher than FY 2014 EPS estimate of $2.14. The table below summarizes the current Analyst consensus estimate.
Source: Yahoo Finance
Interactive corp currently trades at a PE ratio of 26.5 and a LTM price to sales ratio of 1.6. The current PE ratio is skewed by the write offs (Aereo majorly) in the recent quarter (Q2 2014). The historical PE ratio over the last three years is shown in the chart below.
IACI P/E Ratio Chart
Source: IACI PE Ratio chart by Amigobulls
IACI three year PE ratio and price to sales ratio movements are summarized in the table below.
|Three year average||
|Maximum value in three years||
|Minimum value in three years||
Interactive corp has traded in a PE ratio range of 17.5 to 33.2 with an average earnings multiple of 23.95. Using the data points of historical valuation levels and future growth expectations, we apply a multiple of 20 to FY 2016 earnings in order to arrive at a fair value estimate for IACI, which comes to $74 per share. Our fair value estimate implies a 26.5% upside from the last closing price on Oct 16th.
The major value drivers will be Monetization of the dating suite including Tinder and also the applications revenue growth, which will be closely watched over the coming quarters. In light of the recent correction in stock price and the resulting current valuations, we see significant upside in IACI stock. Our IACI stock analysis rates the stock a buy, reflecting our positive long term outlook on the stock.