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Morningstar | Match and ANGI Homeservices Drive IAC’s Solid 2Q Results; Raising Fair Value Estimate to $195. See Updated Analyst Note from 09 Aug 2018

IAC reported better-than-expected second-quarter 2018 results as its narrow-moat Match business drove much of the top-line growth and margin expansion, while ANGI Homeservices nearly tripled its adjusted EBITDA margin from a year ago. The firm also generated strong revenue growth in its video, and the cash flow generating publishing segment. Match’s Tinder continues to add new users, of which more than half are paid subscribers, which we believe supports our network effect based narrow-moat rating of that business. In addition, while the risk associated with Facebook’s plan to get into online dating remains, we continue to believe it will be a difficult task for Facebook to displace Match. With strong performance in nearly all segments, management raised its full-year guidance. We increased our projections for Match and ANGI Homeservices, resulting in a $195 per share fair value estimate, up from $168. While the stock has increased 18% since it began trading in 4-star territory back in early May 2018 (compared with the 6% rise in S&P 500), with the latest 9% rally Aug. 9 in reaction to the quarterly numbers, we think this no-moat and high uncertainty name is now fairly valued.

Match’s second-quarter total revenue grew 36% to $421 million, driven by paid member count, or PMC, and average revenue per user, or ARPU, which grew 28% and 7% year over year, respectively, driven mainly by continuing user adoption of Tinder Gold. Match’s non-Tinder offerings did not perform nearly as well. In our view, as Match’s dependency on Tinder increases, the firm needs to continue to invest in development of new and innovative features and possibly entirely on new apps to further diversify the portfolio and reduce such dependency.

For the fourth consecutive quarter, growth in North America PMCs accelerated, resulting in nearly a 20% increase year over year. International PMCs continued to outpace North America as they were up 38% from last year. Tinder subscribers grew by 1.7 million from last year, while the other apps’ net subscriber count likely declined by around 100,000. According to management, Tinder’s paid user count now represents more than 50% of total Tinder users, which we estimate is equivalent to nearly a quarter of Match’s total paid member count. This has clearly improved user monetization as overall ARPUs increased 7% from last year to $0.61, again driven by Tinder. North American ARPU of $0.58 was up nearly 4% year over year while international ARPU went up 14% to $0.56.

Another positive aspect of Match’s second-quarter results was the 32% growth in advertising revenue, driven by the addition of video features, along which video ad loads are included. We also think that Match’s higher overall user count is attracting more advertisers. Plus, the firm is likely selling more ad loads as programmatic online advertising helps the buyers and sellers complete the transactions and track ad performance much faster and more efficiently.

ANGI Homeservices revenue increased 17% year over year to $297 million (including Angie’s List revenue in 2017). Service professionals (SPs) and number of requests increased 23% and 30%, respectively. In addition to utilization, the monetization of the SPs was also impressive as revenue generated per SP went up 7% from last year to $1,016. Growth in SPs, requests, and monetization is indicative of this business possibly attaining a network effect moat source. The impressive revenue growth was also partially driven by a jump in advertising revenue as the firm is now selling more ad loads on the ANGI Homeservices platform. With strong top-line growth and some control on the selling and marketing expenses, the segment generated nearly $43 million in adjusted operating profit, representing a 14% operating margin compared with last year’s 5%. We look for continuing operating margin expansion in the ANGI Homeservices segment through our 5-year forecast period.

Video revenue of $63 million was up 8% from last year, mainly due to growth in Vimeo revenue that was driven by an 11% increase in subscribers. We look for the Vimeo subscriber count to hit at least 1 million in the third quarter, which we think will drive the video segment’s high-margin recurring revenue higher, further progressing the business toward break-even or profitability by 2022. Publishing revenue shot up 76% year over year due to continuing growth in overall online ad spending and higher traffic onto IAC’s properties that brought in more ad revenue. Content on Dotdash and Investopedia continue to attract users. In addition, based on the 9% operating margin in Publishing (up from an operating loss in 2017), we are assuming that not much marketing has been necessary to increase content consumption within and traffic to properties in IAC’s Premium Brands group.

Last, revenue in applications declined 1% to $143 million, although that business did post operating margin of around 23%. The decline was mainly due to the segment’s continuing dependency on Google. While revenue generated from mobile devices now represents 20% of applications’ total revenue, we continue to expect further revenue decline through our five-year projected period based on the assumption of no significant growth in demand for IAC’s apps on mobile devices and ongoing decline in desktop.