IAC Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

IAC is a holding company that operates a diversified portfolio of digital businesses, including search, media, and consumer services. It’s known for its spin-off strategy.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

IAC’s business model is centered around identifying, acquiring, and scaling digital businesses, then spinning them off when they reach maturity. This approach allows IAC to capitalize on the high growth potential of young ventures, while potentially reducing its exposure to mature, slower-growth assets.

Business Overview:

IAC’s revenue streams are spread across its diverse segments:

  • Dotdash Meredith: Provides digital and print media content, including online publications such as Better Homes & Gardens and Food & Wine. Revenue includes advertising, subscriptions, and affiliate fees.

  • Angi Inc: Operates a digital platform for connecting consumers with local service professionals, generating revenue primarily from fees charged to service professionals.

  • Search: A diversified search business, primarily generated by Google Adsense, advertising, and other search-related activities.

  • Emerging & Other: Includes the Vimeo video platform, among other smaller business lines. Revenue from video subscriptions, transactions, and advertising.

Industry Trends:

  • Digital Transformation: The shift from traditional media to digital channels is rapidly accelerating, benefiting IAC’s portfolio of digital brands and search businesses.
  • E-commerce growth: The proliferation of e-commerce is transforming industries, and companies that can capture the right position and the high demand are set to thrive and capture more profit.

Competitive Landscape:

IAC operates in several competitive markets.

  • Dotdash Meredith competes with large media companies, but a wide variety of digital and print publishing firms.
  • Angi Inc. competes with other home service platforms, as well as individual local service providers. It relies heavily on its ability to generate leads for these professionals.
  • Search is dominated by large players like Google and Microsoft, making organic growth challenging for any challenger in the market.
  • Emerging & Other The nature of the businesses varies a lot but it is characterized by fragmented and highly competitive market with many niche businesses.

What makes IAC different?

  • Spin-off Strategy: A major distinction of IAC is its approach of developing and spinning off valuable business units for investors. This has been a successful strategy and generated great value for shareholders and at the same time created new opportunities to the spun off companies, such as Match Group, Vimeo and Angi.
  • Diverse Portfolio: IAC operates a collection of different businesses across diverse markets, providing some protection from risk through diversification.
  • Focus on building digital assets: IAC has a strategy of investing and helping build digital brands and services to increase their value and market share.
  • Decentralized Management: The management operates a very hands-off approach with the companies they own, mostly providing support for capital allocation and strategic matters.

Financial Analysis:

IAC’s financial performance shows a mixed picture, with strengths and challenges in different segments. The company’s overall revenue increased significantly from $4.3B in 2021 to $4.6B in 2022 and to $4.7B in LTM 2023. But, some segments, like the Emerging & Others and particularly the Digital segment are seeing decline in revenues, whereas, Dotdash and Angi Inc. are continuing their growth trends. In terms of profits, IAC recorded a net loss of $427M in 2022 and $546M in 2023. Some of the large write downs have been due to impairments, but also the operations have been impacted by rising input costs, interest rates, and decline in advertising spending as the overall macroeconomic conditions have worsened. The gross profit in the same time went up from $2.378B in 2021 to $2.524B in 2022, and again dropped to 2.384B. However, despite this, the company is committed to increasing operational efficiency and maximizing value creation, including ongoing strategic reviews of the company’s operations. The debt levels remain relatively low but not immaterial, having $1.7B in long-term debt and $1.5B in cash and short-term marketable securities by the end of 2022, but have decreased to a total of $1.4B of debt and $1.4B in cash by the end of Q3 2023, thus maintaining stability in the balance sheet. But, the cash levels are decreasing as the investments they are making are quite significant.

Moat Analysis: 3/5 IAC’s moat can be described as “narrow” or “medium” due to the presence of several favorable factors, as well as threats to its core businesses. There are clear and understandable drivers that create a strong moat but not completely insurmountable in today’s competitive landscape.

  • Brand Strength: Dotdash Meredith includes a few well-known brands with strong brand loyalty like Better Homes & Gardens or Food and Wine which do offer a little competitive advantage.
  • Network Effects: Angi Inc. benefits from a network effect with both service providers and customers finding value in their platform. As the user base expands, the platform becomes more valuable to users, which can create a sustainable competitive advantage. But, this is an easily replicable moat and in the fast moving internet world it can be taken over by other similar players.
  • Switching Costs: In general the company doesn’t have strong switching costs as it lacks subscription-based offerings. Though, for specific businesses like Angi, their established base of service professionals provide some lock-in with their customer base.
  • Barriers to Entry: Some businesses, like the large media outlets under Dotdash Meredith, have high barriers to entry from high initial investment and time-consuming branding required to make a successful media channel.
  • Scale: Some of the businesses have attained scale that provides a cost advantage, especially in mature segments with limited potential for growth.

Risks to the Moat and Business Resilience:

  • Digital Disruption: The rapid pace of technological change could disrupt existing businesses, requiring companies to quickly adapt.
  • Competitive Pressure: New platforms and players constantly pop up in the market, making it extremely hard to remain on top in these markets.
  • Economic sensitivity: IAC’s business may face slower revenue growth due to an economic downturn, in the light of the slowdown in advertising spending and home repairs.
  • Integration Risks: As IAC relies heavily on acquisitions, the challenge is to integrate those companies effectively to realize all of the anticipated benefits and synergies, and poor integration can lead to loss of value.
  • Management Execution Risks: The company relies heavily on a skilled management team with the ability to quickly make decisions based on macro and market indicators.
  • Concentration of debt: They have relatively high amount of debt with a potential of increasing interest rates which may become a burden to company’s profitability.

Understandability: 4/5

While IAC’s basic structure as a holding company is easy to grasp, the complexities arise from the diversity of its operations, including specific features of each of its numerous businesses. Also, their constant spin-off strategy and acquisitions can be somewhat difficult to understand. A lot of nuances are involved in their business. Therefore a more comprehensive knowledge is necessary.

Balance Sheet Health: 3/5

The balance sheet is in a moderate position. The current debt to equity ratio is slightly high. Also, the company’s current ratio indicates it has enough current assets to meet its short term liabilities. Although debt has been trending down from past, but the overall debt figures are still relatively high and may prove troublesome for the company. The company is highly dependent on acquisitions to achieve growth, so the debt is something investors need to pay attention to.

Recent Concerns & Controversies:

  • Economic Slowdown There has been a general slow down in global economy which is reflecting across all industries. IAC’s revenues may suffer in near to medium term due to this recessionary environment. It may also lead to a less than desired growth in the company’s businesses.
  • Impending Recession: The high debt, paired with impending global recession can impact IAC’s financials. The company needs to carefully monitor and manage capital structure and reduce debt and leverage.
  • Losses: The recent losses and lower guidance is a matter of concern for investors. The management team should find ways to improve operations and generate profits. There were some write-offs also in past earnings, and these also raise a concern about their accounting practices.
  • Management changes: The announcement that Mr. Levin (the CEO) is stepping down from his role after a transition period, may cause some turbulence and uncertainty in the company’s leadership.

Management Discussion:

The company’s management has addressed these concerns in recent calls. They have focused on improving operational efficiency and streamlining processes. Additionally, they are focused on growing their recurring revenues, rather than relying primarily on acquisitions or other inorganic means. The management has expressed confidence in their ability to weather the current storm and remain focused on the long-term growth of the company.

This is a fairly complex business with multiple business lines and lots of moving pieces. So, while its business model is not very difficult to understand, but analyzing and forecasting its revenue is quite hard. Therefore an understandability rating of 4 is fair. The balance sheet is moderate, with a medium amount of debt and enough liquidity, giving a score of 3/5.