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Morningstar | IAC Reported Mixed 4Q Results; Further Reinvestment in ANGI Homeservices Expected; Raising FVE. See Updated Analyst Note from 08 Feb 2019

IAC’s fourth-quarter results beat our expectations and consensus on revenue but came in a bit short on operating income as sales and marketing expenses increased more than expected. Management’s full-year operating income and EBITDA guidance was below our expectations as the firm plans to increase investments in ANGI Homeservices, which we think will pay off in the long run. We do think that a network effect economic moat source for this business, similar to Match, is possible. We raised our fair value estimate of IAC to $221 per share from $195 mainly due to our higher valuation of Match and margin expansion expected in all other businesses during the next five years. IAC shares are currently trading at a slight discount to our fair vale estimate, and we recommend investors to wait for a wider margin of safety before taking a position in this no-moat and high uncertainty name.

Match ended the fourth quarter with total revenue of $457.3 million, up 21% year over year. Total subscription or direct revenue grew 22% from last year to $445.1 million. Tinder remains the main driver of such growth as the paying subscribers of the app grew 40% year over year and 6% sequentially to 4.3 million. Match’s overall subscriber count was up 17% from last year to 8.2 million. Monetization of each subscriber did improve; however, that was also mainly driven by Tinder. Match’s total average revenue per user, ARPU, increased by 4% from last year, but the ARPU of Tinder alone was up 12%. Match’s fourth-quarter operating margin came in at 33%, about 70 basis points below last year’s as the firm continues to invest in additional Tinder features plus some new offerings.

ANGI Homeservices grew its fourth-quarter revenue to $279 million, up 25% year over year as demand growth continued to outpace supply. Service requests were up 24% from last year while the number of service professionals grew 18%, which was impressive, in our view. Quite possibly, a network effect economic moat source could be developing for this business as revenue generated per service professional was up 16%. In our view, as more consumers make service requests on the ANGI Homeservices platform, more service professionals could jump onboard, which then will attract more consumers. The segment reported operating income of $17.9 million, which represented operating margin of 6.4%, compared with an operating loss in 2017.

On the video content creation front, total Vimeo subs grew only 9% from last year, which to us was slightly disappointing. But that segment’s recurring subscription revenue did increase 30%, which we remain convinced can lead to Vimeo becoming profitable possibly by 2023. In addition, Dotdash, which owns various brands of websites and apps that provide information regarding different subjects, displayed solid growth in the quarter as based on figures provided by IAC, we estimate its overall monthly user count has increased by over 20% per year since 2016. This is a high-margin business as it generates revenue by selling digital ads. Dostdash’s operating margin came in at 29% during the quarter, significantly above last year’s 16%, driven by strong revenue growth.