Matchmaker, Rule Breaker
Sure the experience might suffer a bit, but Facebook is well into its monetization stage, where it’s discovering just how many billions are cool enough to make plastering ads over every available inch of white space worth it.
Meanwhile, there’s a company out there that’s been successfully monetizing online eyeballs for more than a decade. It’s not swelling at Facebook’s pace, of course, but it’s managed double-digit growth for the last four years and, crucially, sells for just 11 times next year’s earnings.
Unlike Facebook, it won’t have to bring the Internet to remote African villages to ensure that its trajectory doesn’t falter. This underappreciated Internet cash cow is called IAC/InterActiveCorp (Nasdaq: IACI) and all it has to do to fulfill its promise is to keep answering people’s questions and helping them find love.
More than half the revenue and 60 percent of the profit comes from the ads served up either by the Ask.com search engine or on the About.com sites. Another quarter of the revenue and the other 40 percent of the profit comes from InterActive’s stable of matchmaking sites, running the gamut from the squares smorgasbord Match.com to the younger, nerdier OKCupid and on down to Tinder, an app that will inform you if another user at the bar has beer goggles foggier than yours and would like to hook up.
This is InterActive’s real gold mine, because lonely people have been demonstrably willing to spend online to become less lonely. Match.com prints money, OK Cupid is flashing sexy growth, and Tinder is grooming the next generation of middle-aged Match.com customers once their hookup-inspired first marriages break up.
This empire of lonely hearts and answer seekers is presided over by the conveniently married media mogul Barry Diller. He controls IACI via special shares giving him more than a third of the voting power as well a board of directors filled with cronies, including former Disney chief Michael Eisner and former First Daughter Chelsea Clinton.
Despite Diller’s celebrity connections, InterActive is a lunch pail kind of company, as reflected in its steady-as-she-goes performance and modest valuation. It focuses on niches others find too small and looks to quickly turn them into profit centers. InterActive owns the video-sharing site Vimeo alongside Dictionary.com, CollegeHumor.com, the Citysearch network of local guides, sales-leads generator Felix, home-improvement directory HomeAdvisor and production studio Electus.
InterActive is also an investor in Aereo, a startup successfully disrupting the cable oligopoly by delivering broadcast signals over the Internet to subscribers.
Last year, InterActive bought About.com from the New York Times (NYSE: NYT) for $300 million. That asset seems to be on pace to earn approximately $40 million this year and could pay off the investment in six years or less, considering revenue and profits were up nearly 50 percent year-over-year in the most recent quarter.
Meanwhile, the Match.com unit that now includes two European sites delivered revenue growth of 9 percent and is expected to show low-double-digit growth for the year, along with a “strong double-digit” increase to the bottom line. Management continues to expect InterActive as a whole to grow revenue at least 10 percent this year, translating into a 30 percent surge in operating income before amortization.
The common shares enjoy robust institutional support — funds own 90 percent of the float, led by Wellington Management’s 12.5 percent stake. Star hedge fund manager David Einhorn of Greenlight Capital has lately come to appreciate InterActive’s attractions as well, accumulating most of his 2.3 percent stake in the second quarter of this year.
Risks to the story include the disruption of InterActive’s matchmaking cash flow by new competitors as well as the company’s heavy reliance on Google (Nasdaq: GOOG), which serves up the ads on its sites.
On the other hand, InterActive knows something about disruption as well, and the potential rewards from new ventures like Aereo are not baked into the share price. Neither is Match.com’s potential for international expansion.
The stock was challenging last year’s longtime highs before the late-July earnings report, which proved anticlimactic and sent the price back down to the nearby 50-day moving average. It’s been consolidating there since, but still shows a modest 7 percent gain year-to-date.
That’s peanuts for high-flying Facebook, perhaps. But better times are coming for a stock that never got invited to the Internet ball. The thrift-store Cinderella could still meet her prince. I hear Match.com has his profile.