IACI - IAC/InterActiveCorp

[ni-co]

Ok, this is not a "classic" value investment but it's a classic spin-off story:

http://www.valuewalk.com/2015/05/interactive-corp-long-tinder/ – pdf download.

 

I have nothing to add but these 3 points:

[*]This is the winner of the Ira Sohn Investment Contest 2015 (take a look at the jury…).

[*]IACI's price has risen only about 10% from there.

[*]Risk/reward of the IACI LEAPs looks very interesting to me…

[berkshire101]

Well... I met my girlfriend on Match.  And met other great girls on Tinder, OK Cupid, and Match too. 

 

I only paid for my Match subscription.  I didn't spend a single penny on the other sites.  Plus, I had ad block running so no ads were shown on OK Cupid.  There was the occasional pop-up add on Tinder.  Plenty of Fish wasn't a good experience since it didn't have features like who did you messaged.  Match and OKC did.

 

As a user, there's a lot of value to be had.  You can't put a price on love.  But as a business, I'm not sure how OKC, POF, and Tinder make money.  The audience tends to be much younger, late 20s and younger.  And most are pretty cheap.

 

Girls I went on dates told me they got bombards with tons of messages by guys.  One would get like 100 messages per day.  So for them, they put up like a shield and wouldn't even read most messages.  It's competitive out there for guys.  Since you have tons of guys all messaging the prettiest girl. 

 

I don't see girls upgrading to the extra features on the free sites.  They're not the ones usually sending out messages.  It's the guy that does all the message so maybe they'll buy the extra features to see if their messages were read or not.  But most people I talk say they don't care because they'll just message another girl.

 

With Match, it's a more mature crowd that's willing to folk over the extra dollar for features. 

 

That's my understanding of the online dating stuff.  It's surprising that all these websites are owned by one company!

[jay21]

Ok, this is not a "classic" value investment but it's a classic spin-off story:

http://www.valuewalk.com/2015/05/interactive-corp-long-tinder/ – pdf download.

 

I have nothing to add but these 3 points:

[*]This is the winner of the Ira Sohn Investment Contest 2015 (take a look at the jury…).

 

If it was that great of an idea they would buy it.

[ni-co]

This is more or less the kind of response that I thought I'd get. This is an unorthodox investment idea in that it's at the crossroads between special situation and VC.

 

The unique thing about this situation is that it's the rare chance to invest in an extremely high growth start-up in a phase in which you normally can't invest. And it's not that dating apps/sites don't have business models. This is not a complete puff bag.

 

As a user, there's a lot of value to be had.  You can't put a price on love.

 

This is exactly it. If dating services work, they can be very valuable for the people using them.

 

Why is there no moat? Because there are other (completely) free alternatives? Keep in mind that Tinder is and will likely remain free for 98% of its users. This is about the difficulty of getting traction and especially about the network effect. Why do you think FB paid $1bn for Instagram and $17bn for Whatsapp? And those apps don't even have valid business models. They paid those sums because it's not easy at all to create an app or service that is so compelling that it gains traction immediately. And it's even extremely difficult for established players to simply clone such a service. Well, Tinder quite obviously has traction. And this is why I agree with the author that Wall Street is using completely false instruments to measure the attractiveness of Tinder. You can't value a company that's growing like crazy (and is earning money!) like an established publicly listed company. – The math just doesn't work. How do you project 2017 EBITDA in a company that grew 300% last year? Having such traction with users and, at the same time, having a business model is quite rare. Therefore, yes, those are aggressive EBITDA assumptions but private valuations are exactly the right comps in this – very special – case. This is a "late stage VC"-like investment and carries the same risks but it also has the same payouts. And VCs normally don't get call options.

 

What matters to me in the end is risk/reward and the ratio of the LEAPs is extremely good. I don't need +50% confidence in a valuation when my payout can be 10-70x.

 

It's surprising that all these websites are owned by one company!

 

Surprising maybe, but you'd bet that it's not chance. Barry Diller is a very smart guy and he is buying those services left and right because they have a moat. You need a very large critical mass of willing people to get a dating service to work.

[ZenaidaMacroura]

Met my gf of almost a year on tinder as well...

 

It's a pretty convenient app but I also feel like it's no moat.

[Picasso]

This is more or less the kind of response that I thought I'd get. This is an unorthodox investment idea in that it's at the crossroads between special situation and VC.

 

The unique thing about this situation is that it's the rare chance to invest in an extremely high growth start-up in a phase in which you normally can't invest. And it's not that dating apps/sites don't have business models. This is not a complete puff bag. If dating services work, they can be very valuable for the people using them.

 

Why is there no moat? Because there are other (completely) free alternatives? Keep in mind that Tinder is and will likely remain free for 98% of its users. This is about the difficulty of getting traction and especially about the network effect. Why do you think FB paid $1bn for Instagram and $17bn for Whatsapp? And those apps don't even have valid business models. They paid those sums because it's not easy at all to create an app or service that is so compelling that it gains traction immediately. And it's even extremely difficult for established players to simply clone such a service. Well, Tinder quite obviously has traction. And this is why I agree with the author that Wall Street is using completely false instruments to measure the attractiveness of Tinder. You can't value a company that's growing like crazy (and is earning money!) like an established publicly listed company. – The math just doesn't work. How do you project 2017 EBITDA in a company that grew 300% last year? Having such traction with users and, at the same time, having a business model is quite rare. Therefore, yes, those are aggressive EBITDA assumptions but private valuations are exactly the right comps in this – very special – case. This is a "late stage VC"-like investment and carries the same risks but it also has the same payouts. And VCs normally don't get call options.

 

What matters to me in the end is risk/reward and the ratio of the LEAPs is extremely good. I don't need +50% confidence in a valuation when my payout can be 10-70x.

 

I would argue that Whatsapp and Instagram do in fact have valid business models.  If they don't have business models then I can't say that Tinder would have one.  But that aside...

 

It seems like the typical Wall St response to this is that Tinder is like Twitter and difficult to monetize.  I'm not so sure about that.  It seems like the barrier to create this kind of network effect is extremely difficult and the simplicity of the Tinder process creates less reason to use another service.  It also seems like a good platform to create extra streams of revenue without a lot of risk to create a run from the network to alternatives.  Seems like a ton of operating leverage to be had here.

 

I like the story on this stock but would like to spend more time on it.  I bought a fairly large position in the $60's with the purpose of doing more work before buying more.  But it's gone up and I've been spending more time on other positions that haven't worked as nicely.

 

I would like to see a better bear response than "I used Tinder and was able to nail a few girls/guys for free and don't see how they'll make any real money."  Perhaps a view on capital allocation if Tinder does become a gravy train for the parent company.

[berkshire101]

"I used Tinder and was able to nail a few girls/guys for free"

 

That sums up tinder.  ::)

[ni-co]

It seems like the typical Wall St response to this is that Tinder is like Twitter and difficult to monetize.  I'm not so sure about that.  It seems like the barrier to create this kind of network effect is extremely difficult and the simplicity of the Tinder process creates less reason to use another service.  It also seems like a good platform to create extra streams of revenue without a lot of risk to create a run from the network to alternatives.  Seems like a ton of operating leverage to be had here.

 

I like the story on this stock but would like to spend more time on it.  I bought a fairly large position in the $60's with the purpose of doing more work before buying more.  But it's gone up and I've been spending more time on other positions that haven't worked as nicely.

 

I would like to see a better bear response than "I used Tinder and was able to nail a few girls/guys for free and don't see how they'll make any real money."  Perhaps a view on capital allocation if Tinder does become a gravy train for the parent company.

 

This is exactly my line of thinking. I'm not worried about capital allocation at all because I think Diller has proven to be a very good capital allocator. If he is ready to IPO this company I'm confident that it's ready and he's willing to release it into the wild. If you look at what he did with Expedia in the travel segment – this is what I think he plans to do with Tinder/Match in the dating segment.

 

I think you can get a feeling of how he ticks when you watch those two interviews:

http://video.cnbc.com/gallery/?video=3000377984

 

http://finance.yahoo.com/news/yahoo-finance-exclusive--barry-diller-on-match-ipo-and-more-162152938.html

 

(Keep in mind that IAC was in the process of buying back 10% of Tinder when he did the interviews.)

[greenbriar]

ni-co: which strike price 2017 LEAPs are you buying?  What do you specifically see as the risk/reward on those LEAPs?

[Picasso]

'create extra streams of revenue without a lot of risk to create a run from the network to alternatives.  '

 

How much do you value this 'extra stream of revenue'? what is the down-side risk to the story?

 

Well it seems like the market is not valuing it for very much, so I don't see how you get a lot of downside risk.  That said, when I last looked at the stock it would historically trade at a discount to the SOTP so if Tinder is a flop then it might pull a Softbank and people will sell IACI and the discount will widen out.  So that is some risk but I think the Match segment will hold up pretty well.  Don't hold me to that though because I haven't spent enough time on this as I mentioned.

My concern would be to see monetization efforts that cause the user base to fall and never recover.  But by then you don't have a viable competitor with the scale across an entire country.  It makes sense to use the largest service (like Uber) even if it means paying a little.  It's also a really compelling value proposition because how else do you spend very little to get to effectively speed date?  If there are cheaper ways of doing this I would like to know.

 

I also believe that dating in Tinder form will become more prevalent over time.  I'm pretty sure of that trend.  It just becomes so much more work to go to the club and spend a few hundred dollars to hopefully impress someone enough to take home for the night.  You get to actually control a lot of the things that someone in a loud dimly lit club would never be able to appreciate. 

 

So it is my belief that whoever wins this category will probably be profitable.  I think it was Ackman who said the whole world revolves around sex.  No wonder why he probably upvoted this thesis.

 

Oh, forgot to answer your question about how do you value it.  I don't know but I think the idea is to not value it for very much and hope it turns into something.  That seems to be the case today.

 

[yadayada]

I was at Ira Sohn - wasn't impressed by the idea. The thesis was based on rather aggressive assumptions (using extremely aggressive forecasts for cash flow when at the time the app was earning nothing, using private tech companies as comps... you are going to look undervalued no matter what if you compare yourself to an extremely overvalued company etc), and didn't even consider possible downside risks (which are manifold - there is practically speaking no real moat for this app). As someone who has used Tinder before I have looked at IAC as a possible investment idea before, and I don't think there is as much upside to the story as you or Mr Ira Sohn winner thinks there is.

[TwoCitiesCapital]

I was at Ira Sohn - wasn't impressed by the idea. The thesis was based on rather aggressive assumptions (using extremely aggressive forecasts for cash flow when at the time the app was earning nothing, using private tech companies as comps... you are going to look undervalued no matter what if you compare yourself to an extremely overvalued company etc), and didn't even consider possible downside risks (which are manifold - there is practically speaking no real moat for this app). As someone who has used Tinder before I have looked at IAC as a possible investment idea before, and I don't think there is as much upside to the story as you or Mr Ira Sohn winner thinks there is.

 

I love this show.

 

I've used Tinder. I do think their user base gives them a moat. As others have said, it's incredibly difficult to create something that is sticky with that many people. If you have tens of millions of eyeballs on you, you'll find a way to make money off it eventually. My main problem with this is how sticky is it and how long-lived is this moat?

 

Consumers are fickle and they move on from these things pretty quickly. I used tinder for a few months and then haven't touched it again. Same with Plenty of Fish. Same with Hinge. Of these, tinder is probably the one that most of the people I know use - but that's because they're in their 20s and looking for a hookup. What happens when that crowd gets older and moves on to more mature dating platforms?

 

We already see that Facebook is struggling to keep younger users after it's been the most popular social networking site of the last decade. That's why they felt they needed to spend billions on unprofitable business ventures like WhatsApp and Instagram to keep a younger audience engaged with their product. That's my main issue with these companies - they do have a moat currently. But, will it last more than few years before it voluntarily leaves?

[ni-co]

 

;D So funny but to some extent it's true.

 

ni-co: which strike price 2017 LEAPs are you buying?  What do you specifically see as the risk/reward on those LEAPs?

 

Yeah, this is always the 64k question. I bought the stock and the 125 calls as a kicker. Here's my thinking: I'm perfectly prepared to lose the premium. There are a lot of things that can go wrong with this bet. My biggest concern is plain market risk. If we get into a 50% market correction between now and 2017 you will lose your premium either way – even if you go for the "safe" at-the-money calls. Same would be true if Tinder suddenly flopped, IAC screwed up badly, aliens invading etc. Therefore, I don't want to pay up for a large premium and see the same thing happening to me. If his most optimistic scenario took place (which is a crazy +20bn for Tinder – but who knows? People go crazy a lot) you'd make 70-100x on the 125 calls. If his "bear" scenario took place, which still values Tinder at $4.7bn (!), you'd lose the premium. So will you if Wall Street is right and Tinder is only worth $1.5bn.

 

So, in the end I'd go for the high risk/extremely high reward bet in this case. I know it's aggressive but this is a matter of sizing it. Don't put 50% of your portfolio into it. I'd suggest to play with the Kelly Formula (here is a calculator) – the mathematically correct size for a 70:1 event with 5% (!) probability of success is 3.6% of your portfolio. More than I'd thought (also be aware that this is not an all or nothing bet which Kelly presumes. From $125 on you won't lose all your money/have a smaller payout).

 

I bought the stock because I think Barry Diller is a supreme capital allocator and a great entrepreneur. My thinking is that this is a good time to get into IAC at least somewhat cheaply (because of this spin-off situation). Most people aren't aware of it but if you count in the various spon-off companies Diller compounded the original $400m of IAC capital with more than 24% annually – over 20 years, with very little leverage. Though I'd guess that half of the returns is Expedia.

[ni-co]

This is the winner of the Ira Sohn Investment Contest 2015 (take a look at the jury…).

 

If it was that great of an idea they would buy it.

 

Not that it's affecting the investment thesis but Greenblatt and Ackman won't hold it because it doesn't fit their approach (and it's also too small for Ackman). I don't know how the vote in the jury was but I wouldn't be surprised if Seth Klarman voted this one down. Einhorn has been holding IACI for 2 years now trading around his position. Dan Loeb – no jury member but the kind of guy I'd watch for those ideas – bought it in Q4 2014 and added in Q1 2015.

[ni-co]

The Match Group (MTCH) IPO prospectus is out. Something's gotta give. This could be a real special situation opportunity, guys:

 

https://www.sec.gov/Archives/edgar/data/1575189/000104746915007908/a2226226zs-1.htm

 

Looks to me, as if MTCH will be worth at the very least $50 per IACI share. Possibly a lot more. Just some food for thought: If you want to get crazy (which Barry Diller tells you not to do) and you assign to it Facebook's EV/EBITDA (ttm) of ~40x it could be worth up to $120 per share, if you use FB's FCF/Market Cap multiple of ~75x, it could be $210 per share. In any case, online dating seems to be a really good FCF business. I really like the business model. It's cash flow oriented and large scale at the same time. Diller, by the way, is demonstratively restrained about Tinder (at the same time he's talking about hundreds of thousands of subscribers).

 

My biggest problem is how to value the rest of IACI. Should be somewhere between $30 and $70.

 

In any case, this remains a very good risk/reward bet for me. Momentarily, the best idea I have.

 

Nobody is talking about this. Makes me wonder why. "Tinder IPO" should be a really hot media topic. Maybe it's a bit too early for that. But I would be very surprised if this IPO wouldn't be hyped by CNBC & Co.

[KJP]

 

Looks to me, as if MTCH will be worth at the very least $50 per IACI share. Possibly a lot more. Just some food for thought: If you want to get crazy (which Barry Diller tells you not to do) and you assign to it Facebook's EV/EBITDA (ttm) of ~40x it could be worth up to $120 per share, if you use FB's FCF/Market Cap multiple of ~75x, it could be $210 per share. In any case, online dating seems to be a really good FCF business. I really like the business model. It's cash flow oriented and large scale at the same time. Diller, by the way, is demonstratively restrained about Tinder (at the same time he's talking about hundreds of thousands of subscribers).

 

Dating websites/apps have different (and worse) characteristics than something like Facebook because they have significant built-in churn.  If the website/app creates a good match, you stop using it, and if the website/app doesn't, you also stop using it.  That will cause customer acquisition costs to be high relative to users' lifetime value.

 

Also, I doubt there are significant barriers to entry to this industry.  Tinder's rapid rise suggests there isn't.  Also, what has the historical return on invested capital been for IAC's dating businesses if you include all of the goodwill and intangibles? 

 

A similar take:  http://andrewchen.co/why-investors-dont-fund-dating/

 

[ni-co]

 

Looks to me, as if MTCH will be worth at the very least $50 per IACI share. Possibly a lot more. Just some food for thought: If you want to get crazy (which Barry Diller tells you not to do) and you assign to it Facebook's EV/EBITDA (ttm) of ~40x it could be worth up to $120 per share, if you use FB's FCF/Market Cap multiple of ~75x, it could be $210 per share. In any case, online dating seems to be a really good FCF business. I really like the business model. It's cash flow oriented and large scale at the same time. Diller, by the way, is demonstratively restrained about Tinder (at the same time he's talking about hundreds of thousands of subscribers).

 

Dating websites/apps have different (and worse) characteristics than something like Facebook because they have significant built-in churn.  If the website/app creates a good match, you stop using it, and if the website/app doesn't, you also stop using it.  That will cause customer acquisition costs to be high relative to users' lifetime value.

 

Also, I doubt there are significant barriers to entry to this industry.  Tinder's rapid rise suggests there isn't.  Also, what has the historical return on invested capital been for IAC's dating businesses if you include all of the goodwill and intangibles? 

 

A similar take:  http://andrewchen.co/why-investors-dont-fund-dating/

 

To your second question: I don't know. But what I do know is that Diller generated ~30% CAGR over two decades if you include all the spinoffs. That's why I don't think that they overpaid for them as your question might suggest.

 

I don't really see a strong counter-argument here. Nobody knows where FB will be in 10 years, either. Yes the network effects may be stronger. But Tinder et al. has far more room for growth. And MTCH throws off a lot of FCF.

[ni-co]

MTCH will be valued at ~$38 per IAC share at IPO giving it a ~3.5bn market cap and ~4.9 EV.

 

https://www.sec.gov/Archives/edgar/data/1575189/000104746915008434/a2226458zs-1a.htm

 

This IPO is not expensive. Giving you a FCF yield of 5%+ and EV/EBITDA multiple of 16.

[ni-co]

MTCH will be valued at ~$38 per IAC share at IPO giving it a ~3.5bn market cap and ~4.9 EV.

 

https://www.sec.gov/Archives/edgar/data/1575189/000104746915008434/a2226458zs-1a.htm

 

This IPO is not expensive. Giving you a FCF yield of 5%+ and EV/EBITDA multiple of 16.

 

It got even cheaper. MTCH will be priced at $12, giving it a $2,92bn market cap or ~$35 per IAC share. It's trading on an EV/EBITDA of 15 and estimated FCF yield of 8.5% (ttm, both readjusted for stock based compensation). I really don't understand why the market reaction is so underwhelming. This is not at all priced for growth.

[ratiman]

Isn't the reason it's not priced for growth because Tinder is cannibalizing the other sites? You can't just look at Tinder and ignore that Tinder doesn't monetize as well as Match. Tinder is great except that the company is called Match.

[ni-co]

Isn't the reason it's not priced for growth because Tinder is cannibalizing the other sites? You can't just look at Tinder and ignore that Tinder doesn't monetize as well as Match. Tinder is great except that the company is called Match.

 

This assumes that the established dating sites and Tinder cater to the same market which is quite obviously not the case. Naturally, there is some overlap but if analysts really took a step back used their brains and thought whether all the people using the other sites would be just fine switching to Tinder they would soon discover that this theory is mostly nonsense. Tinder's market is far bigger to begin with and its user base is much younger. I'd bet that most of them wouldn't even have thought of online dating before Tinder became a thing.

 

I've read several times that high churn rates were the problem of dating sites. My question here is: If they were such a problem wouldn't free cash flow be impacted by it? Well, it is not and what that tells me is that customer acquisition costs are still far cheaper than the money you earn from the new/retained customers. We are not talking about a GRPN problem here. There is plenty of FCF.

 

On a larger scale, people really seem to overdo it with disruption theory. They are so afraid of disruption that they mostly ignore how cheap a price they pay for companies with very good business models and large cash flows.

 

Here, you can buy the (seeming) disruptor in a package with the incumbents, together yielding 8.5% free cash flow (4% earnings) with 15% top and 8% annual bottom line growth over the last 4 years and Mr Market's reaction is: meh. I'd rather own MTCH than buy the S&P 500 at a highly levered 4.5% earnings yield or 30y treasuries at 3%.

[ZenaidaMacroura]

The Match Group (MTCH) IPO prospectus is out. Something's gotta give. This could be a real special situation opportunity, guys:

 

https://www.sec.gov/Archives/edgar/data/1575189/000104746915007908/a2226226zs-1.htm

 

Looks to me, as if MTCH will be worth at the very least $50 per IACI share. Possibly a lot more. Just some food for thought: If you want to get crazy (which Barry Diller tells you not to do) and you assign to it Facebook's EV/EBITDA (ttm) of ~40x it could be worth up to $120 per share, if you use FB's FCF/Market Cap multiple of ~75x, it could be $210 per share. In any case, online dating seems to be a really good FCF business. I really like the business model. It's cash flow oriented and large scale at the same time. Diller, by the way, is demonstratively restrained about Tinder (at the same time he's talking about hundreds of thousands of subscribers).

 

My biggest problem is how to value the rest of IACI. Should be somewhere between $30 and $70.

 

In any case, this remains a very good risk/reward bet for me. Momentarily, the best idea I have.

 

Nobody is talking about this. Makes me wonder why. "Tinder IPO" should be a really hot media topic. Maybe it's a bit too early for that. But I would be very surprised if this IPO wouldn't be hyped by CNBC & Co.

I'm a bit behind on this one but after they IPO do they have any longterm plan for the portion still held by IACI?  To be spun out etc?

[ratiman]

Isn't the reason it's not priced for growth because Tinder is cannibalizing the other sites? You can't just look at Tinder and ignore that Tinder doesn't monetize as well as Match. Tinder is great except that the company is called Match.

 

This assumes that the established dating sites and Tinder cater to the same market which is quite obviously not the case. Naturally, there is some overlap but if analysts really took a step back used their brains and thought whether all the people using the other sites would be just fine switching to Tinder they would soon discover that this theory is mostly nonsense. Tinder's market is far bigger to begin with and its user base is much younger. I'd bet that most of them wouldn't even have thought of online dating before Tinder became a thing.

 

I've read several times that high churn rates were the problem of dating sites. My question here is: If they were such a problem wouldn't free cash flow be impacted by it? Well, it is not and what that tells me is that customer acquisition costs are still far cheaper than the money you earn from the new/retained customers. We are not talking about a GRPN problem here. There is plenty of FCF.

 

On a larger scale, people really seem to overdo it with disruption theory. They are so afraid of disruption that they mostly ignore how cheap a price they pay for companies with very good business models and large cash flows.

 

Here, you can buy the (seeming) disruptor in a package with the incumbents, together yielding 8.5% free cash flow (4% earnings) with 15% top and 8% annual bottom line growth over the last 4 years and Mr Market's reaction is: meh. I'd rather own MTCH than buy the S&P 500 at a highly levered 4.5% earnings yield or 30y treasuries at 3%.

 

You're right, it does look like a good business. The real genius of the business is that it spends only around 6% on r&d, whereas most tech companies are in the 10-20% range (look at Linkedin for completely out of control tech spending - and Match and Linkedin are the same business!) And Tinder could have a lot of interesting ways to monetize with advertizing and so on. It's just not that clear right now, and the customers actually paying are aging out of the dating market, as you point out. On the other hand, the land rush days in dating are probably over - I wouldn't want to compete with Tinder or Match at this point.

[ni-co]

I'm a bit behind on this one but after they IPO do they have any longterm plan for the portion still held by IACI?  To be spun out etc?

 

Greenblatt once said in one of his classes that when they only IPO a small part of the company the goal is almost always to achieve a higher price for the whole thing. Spinning the 85% off would be far more tax efficient, but in the end it depends on IACI's cash needs.

 

What they should have done from a tax perspective is the Malone model: First create a MTCH tracking stock - that's tax free and you get almost all the advantages of an IPO (except the cash, obviously) and then, later, do a full spin-off.

[ccplz]

Tinder: http://www.vanityfair.com/culture/2015/08/tinder-hook-up-culture-end-of-dating

 

Interesting read: https://stratechery.com/2015/selling-feelings-follow-up-match-coms-ipo-and-tinder-the-sean-rad-interview/