Diller Beats Google With Top Web Stock: Riskless Return
Billionaire Barry Diller’s IAC/InterActiveCorp (IACI), the owner of dating website Match.com and search tool Ask.com, delivered the best returns of any Internet media company worldwide, trumping Google Inc. and Baidu Inc. (BIDU)
Diller’s collection of more than 50 online businesses outperformed its 12 publicly traded peers in the past two years, according to the BLOOMBERG RISKLESS RETURN RANKING. New York-based IAC had the highest total return and the second-lowest volatility for a risk-adjusted gain of 4.2 percent. Baidu ranked second with 1.5 percent and Google was fifth with about 1 percent. Yahoo Japan Corp. (4689), which lost almost 1 percent, had the worst return.
IAC’s diversity may cushion it from the volatility that has plagued Internet companies since the dot-com boom and bust. Its sites range from eatery guide Urbanspoon to spelling aid Dictionary.com, while applications from Daily Bible Quotes to cartoon-avatar creator Zwinky feed traffic to its search toolbars. Chairman and founder Diller has aggressively bought back stock since 2008 -- cutting the share count by more than half -- and began paying dividends last year.
“We’re looking at risk-adjusted momentum -- the fact that the company has exhibited share-price increase at low volatility suggests there’s stability there, and the potential for continued price increases,” Michael Abata, a portfolio manager at Invesco Ltd. in Boston, said in an interview. “We continue to see estimates being revised upwards, and the company continuing to meet and indeed exceed those expectations.”
Invesco is the fifth-biggest owner of IAC’s publicly traded shares with a 3.4 percent stake, according to data compiled by Bloomberg. The Atlanta-based investment firm’s Global Equity Fund held 63,900 shares at the end of last year and remains a buyer, said Abata, who also works with the quantitative strategies team at Invesco.
The fund likes IAC because of its low volatility, share-price momentum and growth prospects, he said. IAC also trades cheaply relative to peers, while producing strong cash flows, boosting margins and returning cash to investors, he said.
IAC has bought back more than 88 million shares in less than five years. Its board this month authorized the repurchase of an additional 10 million shares, adding to the 1.8 million remaining on a prior buyback authorization.
IAC trades relatively cheaply among global Internet media companies with a market value of at least $500 million, according to Bloomberg data. Investors are paying 10 times its cash flow, compared with the median of 14 times. IAC also generates more cash than most peers, with $4.3 a share last year, versus the median of $1.1.
The stock advanced about 1 percent to $45.23 yesterday and has added 6.2 percent this year.
One of IAC’s steadily expanding businesses is online dating, a service that meets a “universal need,” Chief Executive Officer Greg Blatt said in a May 4 telephone interview. He sees the U.S. as the biggest growth opportunity, while building abroad for longer-term returns as more consumers get online and have the means to make Internet payments. IAC is grappling with exactly how Web courtships will blossom across culturally diverse markets in Asia, Europe and South America.
“We’ve done great in the areas that are like the U.S.,” Blatt said. “We’re trying it in different ways in all these other places, and are putting more resources and energy into it, I think, than anybody else.”
At Match, IAC’s online-dating unit that includes sites OKCupid and Chemistry, first-quarter revenue rose by 56 percent and subscribers by 47 percent. IAC named Blatt, former head of Match, as CEO in December 2010. The company is working to turn around Meetic, the European dating site it acquired last year, shedding unprofitable subscribers. It bought a 20 percent stake in Chinese online matchmaking site Zhenai Inc. in September.
IAC’s niche-interest sites are adding visitors and subscribers. Its Mindspark unit makes applications like Appsassin, SmileyCentral, Ourbabymaker and Guffins virtual-pet adoption, which come bundled with an Ask.com toolbar. That model helps increase the number of questions posed through the toolbar -- and revenue via click-throughs.
“We call them digital snacks,” Blatt said in the phone interview. “They’re not change-the-world products, they’re things that people like to do and play around with. One person’s entertainment is another person’s waste of time.”
IAC also advertises to increase the popularity of Ask.com, which is designed to provide answers to specific queries Google (GOOG) doesn’t deliver, Blatt said. Rather than competing directly with the search giant, IAC created what Blatt calls its own subset for targeted queries.
“Google is sort of an intersection, you get there and there are a bunch of signs that tell you where to go next,” he said. “If you ask something very specific, we try and give you the answer right on the page. It’s more of a destination.”
“Within the search business itself, IAC is quite different from Google and Baidu,” said Sandy Mehta, CEO at Hong Kong-based Value Investment Principals Ltd., an advisory firm that holds IAC stock. “The toolbar business remains misunderstood and largely ignored, allowing IAC to register high growth.”
While Google and Baidu’s main product is search and companies such as Yahoo! Inc. (YHOO) and AOL Inc. (AOL) make money from display ads, IAC has tapped both, albeit on a smaller scale. IAC has increased U.S. Internet-advertising revenue in the past two years, registering $791.7 million in 2011, as Yahoo and AOL declined. Google extended its lead to $17.6 billion, according to data compiled by Bloomberg.
Globally, IAC captured just 1.4 percent of Internet-ad spending in 2011, compared with Google’s 48 percent and Yahoo’s 6.6 percent. About 35 percent of the world’s population were Web users last year, and the total online-ad market will exceed $88 billion this year, according to Bloomberg Industries.
“IAC has positioned itself to participate in the growth of the Internet, broadly,” said Paul Sweeney, a senior analyst with Bloomberg Industries who focuses on Internet and media. “It will benefit from the growth of the Internet audience and Internet advertising. You combine that with a very aggressive cash-return strategy, that’s a pretty good story.”
Still, some investors question whether revenue growth at IAC’s toolbar business can continue as updated Web browsers threaten to make downloading more cumbersome, said Kerry Rice, an analyst at Needham & Co. in San Francisco. He has a hold recommendation on IAC, primarily because of its recent price appreciation.
“Toolbar growth has concerns associated with it,” Rice said. He also said IAC’s Meetic turnaround efforts will hurt margins of its dating business in the near term.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses.
IAC has delivered the most among the 13 members of Bloomberg’s Global Internet Media Index that have been publicly traded for at least two years. Bloomberg excluded seven peers that have traded for less than the two-year comparison period: Groupon Inc., LinkedIn Corp., Zynga Inc., Yelp Inc., Yandex NV, Pandora Media Inc., and Facebook Inc., which debuted last week.
Diller has spent decades in media and entertainment, working his way through the industry from being a television executive at ABC Entertainment in the 1960s to running companies including QVC Inc., Vivendi Universal Entertainment, Paramount Pictures, and creating Fox Broadcasting Co. He built the current IAC via a series of deals after selling off cable channels and in 2005 buying Ask Jeeves Inc., now Ask.com. He owns all of IAC’s Class B shares and controls about 43 percent of votes.
A self-proclaimed “spin master,” Diller has spun off units when they’ve reached a sufficient size, such as ticket company Ticketmaster Entertainment Inc., travel booking service Expedia Inc. and television’s Home Shopping Network Inc.
IAC’s businesses now include television projects “Fashion Star” on Comcast Corp. (CMCSA)’s NBC network and the Food Network’s “Chopped”, to the magazine Newsweek and news site Daily Beast, and video services Vimeo and Aereo -- the targets of multiple lawsuits from the TV providers they are seeking to displace.
While Diller said in February he wasn’t contemplating any fresh IAC spinoffs, investors are underestimating potential future payoffs from standout businesses in IAC’s collection, Mehta said.
“IAC’s diversified Internet businesses give investors a virtually free option on a number of growth engines, and if any one of these businesses clicks, the stock can be a potential multibagger,” Mehta said. “This was a free option when we first entered the stock around $20, and remains free today.”
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