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Morningstar | IAC’s Match, ANGI Homeservices and Vimeo Drive 1Q Growth; Maintaining $221 FVE; Shares Fairly Valued

IAC kicked off 2019 on a positive note, as its first-quarter results beat our and consensus expectations, driven again by strong top-line growth in Match Group and ANGI Homeservices. Operating margin dipped slightly as IAC continues to invest in accelerating growth in ANGI Homeservices and in Vimeo. We remain confident that Match’s network effect moat source remains intact and believe a similar one may be developing for ANGI Homeservices. We did not make any significant adjustments to our model, since our projections for 2019 were mostly in line with management’s guidance. We are maintaining our $221 per share fair value estimate on this no-moat and high uncertainty name and believe the stock is fairly valued, as it continues to trade in 3-star territory. We recommend waiting for a wider margin of safety before investing this name.

IAC’s Match Group total revenue of $464.6 million was up 14% year over year as Tinder subscriptions grew 36% from last year. Match’s overall number of paid members grew 16%. We estimate that monetization of Tinder users increased 1.7%, although we are now seeing significant deceleration in average revenue per user. Excluding headwinds from foreign currency, growth in ARPU would have been in only midsingle digits, still significantly below the 20%-40% growth the firm experienced the last two years, signaling the declining impact of Tinder Gold, which was first launched in the second half of 2017. Solid growth in Tinder paid users was partially offset by decline in paid users of other apps. Subscribers of non-Tinder apps declined for the ninth consecutive quarter by 2% year over year.

While Match Group is redesigning the Match.com app, we believe that growth in Tinder may be cannibalizing growth in other apps. Most apps under the Match Group umbrella are designed to target different types of singles, but we think the young singles across all genders and sexual orientations, across many geographic locations, and with short- and long-term objectives, may be favoring Tinder over other Match Group apps.

Lack of user growth in non-Tinder apps also hit indirect revenue from those apps, as ad revenue declined 27% from last year. Ad revenue has continued to decline as a percentage of total revenue for three straight years. While sales of ads represent only between 2% and 3% of total revenue, their decline is another cost brought forth to the non-Tinder apps by continuing growth in Tinder. Plus, with Facebook now in the dating app scene, the social network giant could become advertisers’ first choice.

Pro forma ANGI Homeservices revenue grew 22% to $303.4 million, driven by solid growth, or 15%, in demand (those seeking professional services). The supply side, or the paying service professionals, also increased 14%. And as the revenue generated per paying service professional grew 16%, we may be seeing early signs of possibly a network effect moat source developing for ANGI Homeservices. Growth in revenue generated per service professional may accelerate as IAC and ANGI Homeservices will be focusing on bringing in bigger job requests. The firm plans to use its data on various consumers that visit ANGI Homeservices’ sites and apps in order to more effectively target them for larger jobs.

Vimeo year-over-year revenue grew 23% to $43.6 million on the back of 8% higher subscriber count. Recurring revenue from the Vimeo platform increased 25% to $41.3 million, and revenue generated per subscriber improved 13% from last year. As the firm is also adding video-creating tools to the Vimeo platform (after it completes the acquisition of Magisto) we think the stickiness of the platform for its users will increase. In addition, growth in recurring revenue is likely to lead to profitability in about five years. Both Applications and Dotdash also displayed revenue growth, driven by more users and higher traffic; however, operating margin in both declined slightly as the firm continues to spend more on attracting more users.