Monthly Newsletter 09/11:
Topics: Quote, Portfolio Update & Discussion, Comments From Me, Learning hard truth about investing world, & More Books.
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Given my trust of management, any news of capital deployment (as opposed to sitting idle on the balance sheet) is music to my ears
Monthly Newsletter 08/01:
Topics: Quote, Portfolio Update, Portfolio
Discussion, Comments From Me, Announcing Winners of Giveaway, Why Pay
for Fund Managers, More Books, & Sharing “one” Way I Look For
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Nice to see a "not so deep dive" is planned :)
Always enjoy reading your letters, feels like its a good way to catch up with you.
$IAC Stub at 52 week low
This is the approx. stub value for IAC which includes Dotdash Meredith, Care.com, Ask Media, minority stake in Turo, etc.
Christopher Halpin, the Executive Vice President & Chief Financial Officer of IAC, presented at Cowen’s 50th Annual Technology, Media & Telecom Conference in early June and mentioned Adjusted EBITDA for Dotdash Meredith is still expected to be above $300 million, “We feel very good about that.”
Regarding the $450 million guided for 2023, “that is still our target, things that.. we can control we feel good about, and then the broader macro environment when you’re looking at the full year at that point, people ask a lot of questions, we can’t answer those. But we are still definitely targeting $450 million of digital EBITDA next year.”
The market clearly doesn’t believe this is a likelihood as shown by the stub value below.
Will Dotdash Meredith meet expectations?
20%Only the 300 million for FY22
5 VotesPoll ended on: 07/28/22
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Yeah it’s been painful but things are looking good/interesting under the hood so time will tell
July Idea Competition Highlights
As a spectator, I really enjoyed the July Competition pitches. Congrats to @stockopine for winning!
I also wanted to highlight some pitches that I found really interesting.
Also, thank you to @commonstock for hosting this competition!
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The Best Time to Buy IAC Was Yesterday. The Next Best Time is Now
(This writing comes from a draft of our quarterly letter, so it uses "we" instead of "I")
Our goal for investors in the Arch Capital Fund is to compound capital at 15% annually while taking on as little risk as possible. This does not mean risk in the form of short-term stock price movements but does mean in the form of durability and future earnings power of the businesses we own.
At $71 a share, we believe InterActiveCorp ($IAC) is one of the lowest-risk bets to have market-beating returns over the next 1, 3, and 5 years. The long-running acquirer and builder of internet brands has a fantastic track record since its inception in 1995 (13% total return CAGR vs. 10% in the S&P 500), even with its shares plummeting 44% so far in 2022.
At a market cap of $6.55 billion, the stock is severely undervalued vs. its potential earnings power over the next few years. Combine this with a rational executive team, $1.3 billion in dry powder, and acquisition candidates trading at depressed prices, and we are excited about the future potential for IAC shares.
Don’t worry, this is not a sum-of-the-parts pitch, but we will outline what gets us excited about owning IAC over the next 12 months and beyond. But first, a brief history of this idiosyncratic conglomerate.
Note: IAC uses adj. EBITDA as its standard financial metric. We understand this isn’t the best metric for encapsulating what value is getting created for shareholders, but we have to take the cards that are dealt to us. Plus, with the asset-light nature of these internet brands, IAC’s businesses should have strong conversions from EBITDA to free cash flow.
IAC was officially started in 1995 when the company (called Silver King at the time) named Barry Diller Chairman and CEO. Diller was CEO until 2010 and is still the chairman today. The current CEO is Joey Levin, who got the job in 2015 after working at IAC since 2003. He is under a 10-year contract and, from what we can tell, is set on staying at IAC for a very long time.
IAC’s acquisitions started in 1997 with the 50% purchase of Ticketmaster, and management hasn’t stopped buying companies since. You can look at the full history here and here. The most important acquisitions have been Expedia, Match.com, Tinder, and Vimeo, among others. There are also minority investments, including a recent large purchase of MGM Resorts stock that currently is worth around $1.85 billion.
Unlike other conglomerates, IAC acquires and incubates companies with the goal of eventually spinning them out as their own publicly traded entities. The prime example here is Match Group, the online dating roll-up that started with IAC’s purchase of Match.com in 1999. The company eventually bought and built the leader in the space (Tinder), making it a runaway success as an acquisition. When the subsidiary got large enough, IAC decided to spin-out part of its equity in a 2015 IPO and eventually did a full spin-off in 2020. Today, Match Group’s shares trade at a market cap of $19 billion. This has also occurred (with varying degrees of success) with Expedia, Live Nation, Vimeo, and Trip Advisor.
The key takeaway for us is that when IAC builds something, it is not afraid to let it go and chart its own corporate destiny.
1-year horizon: Turo IPO, Dotdash Meredith rebound
Today, after all the spin-offs, IAC is comprised of these assets:
- ~85% ownership interest in Angi, which is a publicly traded stock. We just treat it as an equity stake valued at $2 billion (as of this writing)
- ~15% stake in MGM Resorts (valued at $1.86 billion)
- 27% stake in car sharing start-up Turo (currently valued at $250 million)
- Majority investment in Vivian Health (valued at $300 million)
- Dotdash Meredith publishing division ($2.3 billion in trailing Pro-forma revenue)
- Ask Media Group (generating over $100 million in annual adj. EBITDA)
- Care.com ($340 million in annual revenue)
- $1.9 billion in cash ($1.3 billion at the parent company)
- $2.1 billion in debt
We believe two of these assets have the most potential to catalyze shareholder value in the next 12 months: Turo and Dotdash Meredith.
IAC has an approximate 27% stake in car sharing start-up Turo that can be increased to around 35% with the exercise of its outstanding warrants. IAC acquired this stake back in 2019 for $250 million. The investment is still held at its cost today.
Turo is an online marketplace that enables people to rent cars in a peer-to-peer model. This could mean a rental car for a vacation, a joyride in a sports car, or for whatever (legal) purpose a customer desires. Given how terrible the experience is renting from a traditional service, we believe Turo will have an easy time displacing legacy competitors like Hertz over the next decade.
The evidence is already here that this is happening in spades. In early 2022, Turo filed its S-1 with the SEC in preparation for an IPO. In 2021, the company generated $469 million in revenue, up from only $150 million in 2020 and $142 million in 2019. Through the first quarter of 2022, this stellar growth continued, with revenue hitting $143 million, up from $56 million a year prior. Some of this strong growth is due to the pandemic recovery, but it is still phenomenal growth nonetheless.
Turo’s gross margins are also strong, at 57% in 2021 and 51% in Q1 2022. The company isn’t generating consistent operating income or free cash flow, which makes it tough to value, but with strong unit economics and a huge legacy industry to go after, we think it is smart for Turo to pour money into growing its revenue as fast as possible. With the money that will be raised from this upcoming IPO, the company will have a large war chest to continue this strategy.
If Turo is going to IPO, it will likely be within the next 12 months. The company is on track to do around $600 million in revenue this year (maybe higher) and is on pace to hit $1 billion in annual sales within the next few years. With relatively strong unit economics, it is not unreasonable for the market to value this business at $3 billion when it goes public (of course, in this environment, it might be a little less). If IAC’s stake is 30% after the IPO dilution, that would be worth $900 million, or 3.6x its original investment in 2019. Not bad work, if you can get it.
With an enterprise value of under $2.5 billion excluding Turo (but including Angi as an equity stake), IAC shareholders will benefit greatly when the company goes public within the next 12 months.
Valuing the Turo investment at $250 million, IAC’s enterprise value is approximately $2.15 billion. This is severely undervaluing the earnings power of its operating businesses.
You have the Search/Ask segment, which generates over $100 million in adj. EBITDA. However, this business is in run-off mode and is likely not worth much more than a few hundred million dollars to IAC shareholders today.
The most important operating segment is Dotddash Meredith, a publishing house for various brands like People Magazine, Better Homes & Gardens, and even Investopedia. In late 2021, IAC acquired Meredith’s publishing division for $2.7 billion and combined it with its existing publishing segment called Dotdash. Thus, Dotdash Meredith was born.
IAC’s strategy with these new properties (which have a monthly audience of 144 million, significantly more than the 96 million at Dotdash) is to modernize their advertising strategy and cut out poorly performing print magazines. Modernizing the advertising strategy means fewer but more effective advertisements by focusing on commerce and performance marketing. For example, on a per-user basis, Dotdash’s properties were getting more than twice the amount of performance marketing revenue as Meredith’s before the acquisition was closed.
But in order to make these changes, IAC has to rip out Meredith’s old systems, sacrificing some revenue in the process. This is happening right now, and when combined with a slowdown in internet advertising, is making Dotdash Meredith’s business look really poort. For example, on a Pro-forma basis, Dotdash Meredith’s digital revenue was down 18% year-over-year in June. In a vacuum, this looks bad, but once you understand IAC’s strategy and how much value it can create for these brands over the long-term, this short-term hit is worth it.
Why is this Dotdash advertising strategy so valuable? Well, the proof is in the pudding. From 2018 to late 2021, Dotdoash’s digital revenue compounded at 32% a year using this same strategy, with adj. EBITDA growing from $21 million to $88 million over the same time period. We don’t expect 30% revenue growth from the newly combined company, but it is not out of the question for digital revenue to grow at 10%+ a year once these repairs on the Meredith websites are done.
IAC is guiding for Dotdash Meredith to generate $450 million in adj. EBITDA in 2023. With an enterprise value close to $2 billion, the market clearly doesn’t believe this right now, given where shares are trading. If the segment can reach these profitability goals (and we think they can), the stock should re-rate higher at some point over the next 12 months. Looking out a few years, the segment can easily generate IAC’s entire current enterprise value in cash by 2025, especially if you include the Ask/Search group as well.
However you slice it, IAC stock is trading at an incredible discount right now.
3 - 5 years and beyond: Capital allocation track record
We like IAC’s prospects over the next 12 months. But with all of our investments, we plan to hold the stock for at least three to five years, and hopefully longer. Since IAC is just a holding company, there isn’t much we can forecast on what its consolidated earnings will be in 2025. No, with IAC, it all comes down to trust in Diller, Levin, and the rest of the team to smartly allocate shareholder capital.
It may sound overly simplified, but with a 25+ year track record of beating the market, it is hard not to have confidence the team at IAC will do right by shareholders. Of course, we can never ignore price when buying a stock, which is why we are pounding the table to buy shares today.
Investors should also consider the current economic/business landscape with many start-ups, technology, and internet businesses seeing their market values decimated over the last year. IAC, with $1.3 billion in pure dry powder and an easy ability to find more funding from capital markets, looks poised to acquire some of these distressed (or soon to be distressed) assets at dirt cheap prices.
It is unclear what investment will be the next big winner for IAC. It could be Care.com, Angi, Turo, Vivian Health, or some other business yet to be acquired. But we don’t need to know this information to invest today. As long as the culture that created these market-beating returns is still guiding this ship, we are able to sleep well at night holding our shares.
To sum it up, IAC is trading at a cheap price relative to its current earnings power, has a long-tenured executive team with a great track record of creating shareholder value, and is coming into an operating environment ripe for easy acquisitions. What more could you want in a portfolio company?
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