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Match and IAC Fight Back at Facebook threat with Strong Results and an Audacious Plan

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Match Group (MTCH - Free Report) and InterActive Corp (IAC - Free Report) are on the rise Thursday after both companies reported better than expected quarterly results and, more importantly, laid out the reasons why the treat to their dating apps from Facebook (FB - Free Report) entering the dating market isn’t nearly as bad for them as was previously expected.

Last Tuesday we reported that Facebook announced at its own developers conference that the social media giant was preparing to enter the online dating market with a new feature that allowed current users to opt-in to a date matching service.  IAC and Match stock prices sank 20% and 25% respectively on the news. (Read the original article here)

Recovery Underway?

Both stocks have recovered a bit since then, but still remain well below their all-time highs, set earlier this year.
Is the selloff overdone and does it present a buying opportunity?  Let’s take a look at the numbers and the news.
Match reported on Tuesday, surpassing estimates for both revenue and earnings, postings revenues of $407B – a 36% increase over the same quarter last year – and earnings of $0.33/share, beating the Zacks Consensus Estimate of $0.23/share.  

Average subscribers increased by 26% and operating cash flow and free cash flow were up 36% and 39% respectively.  Match highlighted strong growth in its flagship Tinder product, accelerated by the introduction of paid premium service Tinder Gold last year.

Match also took the somewhat unusual step in the analyst presentation of specifically addressing the Facebook threat, preemptively pointing out its own efforts to preserve user privacy – a veiled dig at Fabcebook’s well-documented privacy issues.  They also revealed that although new Tinder users have the option to sign in with their Facebook accounts, more than 75% chose not to use the time-saving step, apparently an indication that customers overwhelmingly want to keep their social media accounts separate from their dating accounts.

Valuation Still Rich

Though Match has put up impressive numbers and appears well-prepared for the Facebook challenge, Match stock has a value problem.  Even after the recent decline, Match still trades at a sky-high forward  P/E Ratio of  37.9X.  Match would need sharply accelerating forecasts to justify its current price and unfortunately, they’re not there yet.  Thanks in part to stagnation in analyst predictions for 2018, Match is currently a Zacks Rank #5 (Strong Sell).

InterActive Corp is the parent company of Match Group, and also holds a diverse portfolio of other internet assets, most notably ANGI Homeservices Inc (ANGI - Free Report) , operator of the popular web services Angie’s List and HomeAdvisor.  They also own stakes in, and streaming video service Vimeo, among others.

Thanks to a big beat in revenues on reported Wednesday, IAC stock is on the rise once again, up 4% in interday trading.  

Like Match Group, the IAC Investor letter made specific mention of the Facebook threat, but pointed out that “We have a 23-year head start and several months advance warning, and we’re going to take advantage of all of it.”

CEO Joey Levin, appearing on CNBC Thursday morning pointed out that Match had already fended off challenges in the dating market from Yahoo and AOL when those companies were the giants of the internet and that he expected to fare the same in the current environment by providing a superior customer experience.

CEO Hints at Hidden Value

Levin also pointed out an interesting valuation issue that was not specifically mentioned in the official release.  He said IAC owns 87% of ANGI and 81% of MTCH and that if you added the market value of those holdings to the company’s cash on the balance sheet, the total exceeded the market cap of IAC, meaning the rest of the holdings were being assigned a negative value by the markets.  He illustrated that Vimeo in particular had an excellent subscriber base, strong retention and customer life and improving gross margins and yet  was being virtually ignored by IAC investors.

Though Levin played coy when a sharp interviewer asked if that meant investors could expect a Vimeo spinoff, clearly that possibility must be on the table.

Spinoffs of undervalued assets are a common way for companies to unlock hidden market value and are generally positive events for investors.

InterActive Corp is a much more diversified way to bet on a Match Group rebound, while also getting exposure to a high performing basket of internet assets.  Management appears well-prepared for the competitive challenges ahead, and though the MTCH selloff may be justified based on both competitive and valuation issues, IAC seems to have been punished unjustly and could see a significant rebound.


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