Monday, November 4, 2013

IACI: New valuation of $59.50/sh; not much upside

We thought to provide an update on IACI which reported its Q3 results last Tuesday (10/29).  Yes, we are a bit late but we did not 're-activate' our stock tracking and valuation until last Thursday.  As a reminder, we spotted IACI as a value-play in late Jan '13.  Since then, the stock has appreciated 37.8% compared to S&P 500's 17.3%.   It closed at $55.68, slightly higher than our previous $54.00 valuation.

IACI reported mixed Q3 results, as it missed on revenues but handily beat on EPS.  We have a slightly clearer picture of upcoming 2014.  We now value IACI at $59.50/sh (up from our prior valuation of $54.00/sh), which represents only a 7% upside from where it closed on Monday.  For this reason we think the stock is now a 'neutral'. 

IACI's revenue miss was due to Google's (GOOG) latest pricing adjustment as IACI's search business is dependent mainly on GOOG.  We note that such miss came about even though total queries were 30%+ higher Y/Y.  This indicates that GOOG adjusted its prices significantly, to which IACI must adapt quickly.  The 300bps Y/Y operating margin expansion was the good news for that segment.

Slightly better than expected top-line from the Match segment only partially offset the miss in Search & Applications.  Match's 9% Y/Y revenue growth helped expand its margin by approx. 70bps.  

Local, Media & Other segments displayed top-line growth but, not surprisingly, they generated a combined operating loss in Q3.  

With that said, although we do not believe much upside remains in the stock, as usual, the probability of IACI selling portions of its portfolio at some premium and returning the ROI to shareholders is higher than with other companies.  

IACI could also acquire additional businesses to lessen the volatility in its portfolio.  For example, given its dependency on GOOG, the Company could try to buy other remaining small search businesses hoping that faster growing queries could minimize impact of GOOG's pricing policies.  Blucora's (BCOR) Infospace could become an acquisition target for IACI, in our opinion.  

IACI also has some products and services that have not yet been monetized.  Tinder, part of the Match segment, is one example.  The 'on-the-fly' and 'quick' (or short-term) match making service for the ones with the 'urge' has become popular among users within the age range of 25 - 55.  Yes, this is a pretty wide range, which is good news for IACI and its monetization efforts of Tinder, which already is a mobile product.  In addition, Tinder is basically riding the coattails of Facebook (FB), as it is only available for users with FB accounts (as far as we know).  On a side note, this does support the latest figures that FB's popularity among teens is decelerating.  In addition, IACI is a majority owner of Tinder.  Although the stock reacts positively to good news regarding another asset, Aereo, and its battle with MSO's, IACI owns only a minority interest in Aereo.  The stock could react much more positively to any news of progress made in monetizing Tinder.

Another asset which has performed well and still has significant upside is Vimeo, a video sharing website.  According to management, Vimeo has generated $37MM in revenues during the last 12 months.  However, those revenues are generated mainly from the video upload process.  The Company has yet to make money off of video viewing and ads on Vimeo.

While certain parts of IACI's portfolio have some attractive upside (in addition to the Company's nearly 2% dividend yield), we think the stock is now close to fair value.  For FY '13 we expect total revenues of $3.06bil, representing a 9% Y/Y growth.  We expect approx. 200bps EBITDA margin expansion for the Company, resulting in EBITDA of $605.5MM.  For FY ’14 we have modeled in a 10% top-line growth, or $3.37bil in revenues.  Although we expect EBITDA margin to increase slightly more in FY ’14, 240bps to 22.2%, the deceleration in Search & Applications, which represents 50%+ and 60%+ of the Company's revenues and operating income, respectively, is forcing us to continue to apply the same EV/EBITDA multiple for valuing IACI.  At 7.5x our FY ’14 EBITDA estimate, IACI’s EV could be around $5.08bil.  After adding the Company's net cash balance of $188.00MM, we think market value of IACI is approx. $5.26bil, or $59.50/sh.   

By the way, BCOR will be reporting tomorrow after the close.  We will try to post our thoughts on that Company's valuation before the earnings release, but as usual, this is not a guarantee. 

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