The Mathematics of Love
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
L'Amour! L'Amour! Only five weeks until Valentine's Day and romance related stocks will probably start moving soon. One that's sure to hear some chatter as an interesting play on love is IAC/InterActiveCorp (NASDAQ: IACI) and its plethora of matchmaking web sites:Chemistry.com, match.com, okcupid, perfectmatch.com, the European site Meetic, and the most diverse dating community site, PeopleMedia. PeopleMedia has 28 different interest groups including those targeted to Italians, little people, big and beautiful, Mormons, Catholics, Latinos, marriage minded, and so on. With 6 million members on BlackPeople Meet and over 2.8 million on OurTime for singles over 50, IAC has the largest and most diverse assortment of personal dating members out there.
Investing In Love?
IAC's biggest rival in matchmaking is privately held eHarmony, with its avuncular spokesman, Dr. Neil Clark Warren. EHarmony is more a Christian and family value site and has been challenged for years by chemistry.com's more inclusive approach which accepts gays and lesbians and those less interested in a more traditional match. Chemistry.com used to advertise it was the go-to site if you were rejected by eHarmony. Rejected by an online dating site...that's gotta hurt.
Interestingly, IAC's Match.com employs a quant, Amarnath Thombre, and a staff of math whizzes to maintain the logarithms of love. Based on answers and responses to possible matches, preferences are updated with calculated precision. At least as precise as one can be with matters of the heart.. and this leads to an over 50% rate of repeat customers.
Still, this is a business in which people pay to list and communicate with strangers and accordingly the sites are very aggressive about retaining clients, or as one former customer complained, stringing them along. Downside to this division of IAC are disgruntled customers who realize that most dating websites are in fact businesses and in an Atlantic article dating website executives were candid that getting the customers to keep coming back is more important than their customers' level of a commitment in a relationship. A notable dissenter was Alex Zehr, co-founder of Zoosk.com, one of the largest of the ever growing assortment of privately held dating websites competing with IAC.
On a CNBC interview after their Q3 earnings call CEO Greg Blatt said," approximately a million people a week sign up for the dating websites but we only monetize a small portion of those signups" and IAC is "nowhere near saturation globally" for the dating businesses adding the "future is very bright."
Enough about the numbers of love, what about the numbers at IAC?
Can You Love Their Numbers?
IAC is a 4.1 billion market cap internet content provider with a 2.00% yield and a 25.74 P/E with a forward P/E of 12.40. It was just reiterated a buy at a price target of $66.00 by Topeka Capital on December 31, expecting that a recent debt offering of $500 million will be used for share buybacks. The company repurchased 1.3 million shares in Q3 at an average price of $47.12. The median analyst price target is $62.00 for more than 30% upside.
Their Q3 2012 earnings report on October 24 showed 38% revenue growth from $516.9 million to $714.5 million from 2011 to 2012 beating for the eleventh consecutive quarter. Earnings per share however disappointed and guidance was lowered slightly. The Match division did well with revenue of $178.2 million in Q3, an increase of 35% over Q3 2011. Even with dividends and share buybacks according to the Q2 release, "As of September 30, 2012, IAC had $640.7 million in cash, cash equivalents and marketable securities and $95.8 million in debt of which $15.8 million is short-term."
One thing to note about the Q3 release is the company touting its free cash flow but Fool Seth Jayson cautions you may want to take another look at the stock-based compensation and tax benefits. A Goldman Sachs analyst downgraded the name on December 4 with a lowered price target of $42.00. Heath Terry thinks the internet provider is challenged by Google's search algorithms and competition. Since the downgrade the stock is still trading at a 10% discount to what it closed at after Q3 results.
IAC has many different website brands comprising four divisions: Search & Applications (ask.com, the newly purchased about.com, etc) Match ( dating websites), Service Magic, contractor finding and rating websites a la Angie's List, and Media and Other, with humor, entrepreneurial startup (hatch.com), shoes for sale and more. These are competing with other web sites and companies like Google (NASDAQ: GOOG), Amazon, Microsoft, Angie's List, Yahoo!, Walt Disney, and its most direct competitor AOL (NYSE: AOL) as IAC has one of the world's largest family of websites.
AOL is a strong competitor with its On Network service, similar to Google's YouTube and IAC's vimeo. AOL also has search and email and has been implementing a content is king strategy with Huffington Post and improving MapQuest. To accelerate targeted advertising it bought Buysight in December. AOL has a 2.84 P/E but no yield. AOL had a huge beat of $0.04 on EPS estimates when it reported Q3 numbers in November, guiding higher and impressing the Street with better than expected ad revenues
Google, meanwhile still remains the content king, and with its Android, Nexxus tablets, cloud, and search is a growth name and probably the surest bet in this content space. As Goldman Sachs pointed out IAC search sites may be compromised by Google's search algos. Google's P/E is 22.67 and the market cap is 242.9 billion.
Aside from a number of big competitors for IAC on so many fronts, all these different website brands, (150 brands with a billion monthly visits in over 30 countries), create the problem of so many moving parts that an investor has a heck of a time keeping up. Corporate governance risks are slightly troubling with a medium rating on Board, Audit, Compensation, and Shareholder Rights.
Not A Match Made In Heaven
I guess you can buy love, after all. At least a million people a week think so. Even so, IAC is more than just matchmaking. I tend to agree with Goldman Sachs on this name as its search division is challenged and competition is threatening on too many fronts to my liking. Add to that corporate governance risks and that due diligence is complicated with 150 websites. To me, IAC just isn't that all important number, The One.
leglamp has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!