Looking For Love...From Investors

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

InterActiveCorp (NASDAQ: IACI) is a worldwide leader in the online dating world, primarily through its Match brand, but it has been hard pressed to find a similar amount of love from Wall Street.  The company’s stock price has been flat over the past twelve months, with steep declines since October when management revealed FY2013 financial guidance that was below expectations.  Investors also seem to be concerned about rising competition in the U.S. market where InterActiveCorp competes with approximately 1,500 other websites.  According to data provider IBISWorld, the company’s Match unit holds a 24% market share position, followed by Eharmony at 14% and then a long list of upstart companies.  Despite its #1 position, InterActiveCorp hasn’t been sitting idle with the February 2011 acquisition of OKCupid in the U.S., as well as the purchase of stakes in Europe-based Meemic and China-based Zhenai.

Evolution, our corporate motto

InterActiveCorp has been a company in perpetual motion, almost since its founding in 1986.  Controlled by media mogul Barry Diller, the company built up a vast portfolio of online assets that previously included Expedia, Home Shopping Network, and Ticketmaster.  Fortunately, the company modified its corporate strategy around 2005 and started spinning off non-core assets, while retaining the search and dating units.  The former Expedia unit has gone on to create a top global travel brand, with $3.4 billion in annual revenues and a presence in 80 countries.  Meanwhile, InterActiveCorp has used the proceeds from its divestitures to build a strong balance sheet and invest in online businesses that fall within its core segments.

In its latest fiscal year, InterActiveCorp reported revenue and adjusted EBITDA of $2.1 billion and $265.5 million, increases of 25.8% and 63.4%, respectively, versus the prior year.  Despite rising traffic acquisition costs, the company’s operating efficiency improved as more customers utilized its network of websites.  While InterActiveCorp has a significant presence in the online dating segment, it generates almost half of its total revenue from the search business.  During the period, this segment reported a 31% increase in revenue, as users performed almost 50% more searches than in the previous year.  While InterActiveCorp has company-owned websites, including Ask.com and Dictionary.com, it primarily acts as a syndicator of search results from third parties through applications that it places on its partners' websites.

InterActiveCorp’s dating unit also performed well during the period, reporting an 18% increase in organic revenue.  The company’s results also benefited from its mid-year acquisition of a controlling interest in Meetic, one of Europe’s largest dating networks.  The two companies already had a close working relationship through their 50/50 joint ownership of a Latin American dating service, and the acquisition continues InterActiveCorp’s push to own a diverse, global network of websites.  The grand prize is China’s billions of single people and potential subscribers, an area in which the company only peripherally participates through its 20% stake in dating services provider Zhenai.

Looking ahead

Despite its lagging stock price, InterActiveCorp’s financial results through the first nine months of FY2012 have been solid once again, with increases in revenue and adjusted EBITDA of 39.2% and 50.8%, respectively, compared to the prior year period.  The search business was notably strong, with a 45.3% gain in revenue, as users submitted 52% more queries.  While organic revenue growth in the dating segment was only 8.4%, after adjusting for the Meetic acquisition, InterActiveCorp should benefit from future synergies across its larger number of geographic areas.  In addition, the company continues to invest in other online businesses, including the local service matching segment, which it should be able to grow by leveraging its infrastructure investments.  Betting on Barry Diller has generally been a wealth enhancing move, which makes InterActiveCorp a good addition to the portfolio.

An alternative

Investors who don’t like the online dating segment but want to invest in the growth of the search business might also want to look at Blucora (NASDAQ: BCOR).  Like InterActiveCorp, Blucora gets the majority of its revenues from a syndicated search business, where it delivers search results through applications and widgets that are incorporated into its partners’ websites.  Instead of spending capital on the development of a superior search engine, which has been a losing bet for most companies, Blucora’s focus is on designing innovative applications that will resonate with customers. 

In FY2012, the company’s strategy has been working well, with increases in revenue and adjusted EBITDA of 90.8% and 158.2%, respectively, versus the prior year period.  Blucora benefited from a sharp increase in the number of search queries throughout its network, as well as the addition of the TaxACT services business.  Despite significant competition in the tax preparation segment, it is a high-margin business with a consistent, recurring customer base that lowers the company’s reliance on future growth in the search segment.  With a strong balance sheet, Blucora should be on investors’s watchlists.

rghanley owns shares of InterActiveCorp, Expedia, and Blucora. The Motley Fool has no position in any of the stocks mentioned. 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!

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