IAC/InterActiveCorp (IAC)

In our Q4 2019 letter we wrote about our rationale for investing in Match Group (MTCH). Early in the third quarter we used market confusion over the mechanics of the Match Group spinoff to build a position in IAC/InterActiveCorp (IAC) at a discount to IAC’s stake in publicly traded ANGI Homeservices (ANGI) and the cash on IAC’s balance sheet. Confusion over IAC’s debt transfer to Match Group and cash accruing to IAC from Match Group’s secondary proceeds and special dividend created a situation where we were being paid to take ownership in a host of great businesses that are set to compound shareholder value over the long term. IAC has often traded at a curious discount to the value of its businesses, but a newly simplified structure and plans to shine light on the businesses in IAC’s portfolio meant that this negative stub value was especially irrational, and ultimately short lived. Over time, we expect many of the businesses within IAC to be individually worth significantly more than the entire value of IAC today.

From the initial purchase of television station holding company Silver King Communications for $250 million in 1995, Barry Diller and IAC have multiplied their investment by over 240 times. Through a proven repeatable process, IAC identifies nascent businesses exposed to the secular trend of consumers shifting their consumption patterns from offline to online, makes long term investments to remove customer pain points on the supply side and demand side of the marketplace, and drives penetration of the category to take dominant share and to grow the total addressable market. When these category leaders grow their market to the extent that they are able to stand on their own, IAC spins the businesses to shareholders and refocuses its efforts on a new series of e-commerce marketplace businesses.

We often seek situations where proven management teams act like owners and invest through the income statement via lower margins and diminished short-term profits in order to grow market share and grow the market. These situations are inevitably judged harshly by a market myopically focused on the short term, but when executed well by proven operators, these situations create opportunities for outsized shareholder returns. We believe that this dynamic is evident in several of IAC portfolio companies, and that the outcome will be no different. With any investment we make, we look for multiple ways to win. In IAC, we see eight.

First, IAC’s largest holding, ANGI Homeservices (ANGI), is significantly undervalued relative to its earnings power today and has a long runway of high return on invested capital opportunities to take market share, grow the addressable market, and compound shareholder value. ANGI is an online marketplace for home services. Initially founded as a lead generation business, ANGI is rolling out fixed price home services which will accelerate ANGI’s transformation into a platform for managing one’s home. ANGI stands to benefit in several ways.

ANGI has attractive market dynamics from high customer fragmentation on both the supply and demand side of the marketplace and from the non-discretionary nature of 60% of home service requests. Nevertheless, despite the ubiquitous usage of smartphones and the role of the internet in our daily lives, only 20% of home services market transactions occur online. The remaining 80% of home service jobs are sourced offline through referrals and manually tracking down, scheduling, negotiating, and paying service professionals. Tailwinds from tech native home buyers and increasing buyer preferences for on demand purchase functionality create a tailwind for ANGI’s superior product market fit to accelerate this offline to online conversion. However, ANGI’s historical go to market strategy has held back the potential of the business.

Successful marketplace businesses unlock incremental demand in the market by removing buyer friction on the demand side that then leads to incremental demand from new buyers that would not otherwise transact. In home services, customer pain points inherent in the search cost of finding a skilled tradesperson with availability, communicating a job’s complexity, and negotiating timing and pricing means that many home service jobs are simply never completed. ANGI’s business model transition to fixed price offerings unlocks incremental demand in the marketplace by addressing these pain points. With ANGI’s fixed price offering, a consumer on the demand side of the platform browses for their required service, schedules and purchases the quality guaranteed service from a vetted professional at a fully transparent, fixed price. As demand side users increase their use of instant booking and increase their bundling of routine maintenance projects, the ANGI home management platform becomes the place where users look to for bigger ticket and ad hoc projects. As the platform becomes the home management tool for the 6-8 maintenance jobs that the 120 million US households perform annually, this has important implications for pulling service providers onto the platform.

With ANGI, the demand side has a clear product market fit, but the supply side has been the bottleneck to enhancing liquidity in the marketplace. Historically, when certain service providers such as plumbers or electricians were forced to pay for leads that they may not have needed due to capacity constraints, they had no need to spend upfront marketing dollars for incremental business. This dynamic caused 90% of service providers to be resistant to using the ANGI platform. Fixed price offerings are set to address this. With fixed price offerings, service providers are paid instead of charged, and all of their back-end needs in scheduling, billing and collection are automated. In using the ANGI platform, the service provider also benefits from guaranteed jobs at 4-5x the win rate of the previous model without the hassle and inefficiency of paying upfront for unmatched leads. With any marketplace, supply inevitably is pulled to where the demand is, provided the matching mechanism is strong enough. At ANGI, as demand continues to aggregate in the marketplace, and the supply side dynamic changes from sold leads to offered jobs, service provider penetration will continue to grow, reinforcing the local network effects and liquidity of the marketplace.

As liquidity in the marketplace grows, product features such as Home Advisor Pay work to strengthen the moat around ANGI’s business by positioning ANGI in the nexus of payment flow. By being in the nexus of payment flow, ANGI’s deeper relationship with consumers and service providers create the framework to deliver incentive discounts, and to drive referral and loyalty programs. Product line expansion such as financing options for home repair also offer meaningful opportunities to grow the size of the home services market.

IAC and ANGI’s initiatives in fixed price booking feature rollouts are building liquidity on the marketplace. As the flywheel of demand side and supply side user growth turns, the marketplace tips to a point where no user is incentivized to use offline methods to manage their home or manage their business. As home service jobs become more standardized and modularized through ANGI’s fixed price offering, Angi’s ability to set the take rate to maximize revenue and margin dollars improves. ANGI’s current earnings power is primarily based on an advertising rate that is a mid-single digit percentage of the job value. A fixed pricing take rate is 2-3 times greater, and a marketplace take rate at scale is 3-4 times greater. We have seen the power of marketplace businesses that are able to successfully aggregate demand while commoditizing supply, both in taking share and in growing the market itself, and we believe that ANGI Homeservices will be no different.

Second, Vimeo is set to compound IAC shareholder value as the secular tailwinds of video communication layer subscriber growth on top of Vimeo’s purpose-built scalable infrastructure. Vimeo is a cloud-based video software platform that independent creative professionals and businesses use to create, host, distribute, market, analyze, and monetize videos. In Vimeo, we see similarities to the business model and go to market strategy that attracted us to Wix.com (WIX). Through a freemium, self-service customer acquisition funnel, Vimeo lowers the barrier to professional quality video creation in the $30 billion video solutions market. As Vimeo’s 175 million users convert to paying subscribers, 60% of users onboard themselves and 99% of the 1.5 million subscribers use the platform on a fully self-service basis. An established footprint with at least one paying customer in over 60% of Fortune 500 companies provides significant opportunities for subscriber growth.

When one considers the size of the market and Vimeo’s strategy to grow the market, the structural advantage of IAC ownership is evident. When faced with the opportunity to be profitable in 2021, IAC and Vimeo instead chose to press the accelerator on top line growth. In choosing to maximize the opportunity to unlock more utility functions for enterprise customer use, Vimeo has a long runway to increase enterprise ARPU by multiples of its current rate of $12,000. We believe that eventually, all one million global enterprises and 800 million small and medium sized businesses with an online presence will use video to communicate with their team members and customers. IAC’s expertise in investing in the product to take out friction and develop more use cases to amass digital subscribers and increase the addressable market has been executed as a proven, repeatable process many times before, and we expect Vimeo to be no different.

Third, Care.com is in the early innings of a turnaround that will compound shareholder value over the long term. Care.com is an online marketplace that connects care providers to households. The provision of home care is a $300 billion market in the United States and is supported by long term demographic tailwinds from an aging population needing elder care and from tech native, dual working parents needing childcare. As the market leader with dominant scale at thirty times the size of the next largest competitor, but with only a small fraction of the offline share, Care.com is in the early innings of transforming the industry from offline word of mouth search to online search and conversion. The first step in optimizing liquidity on the platform to transform the way users procure care providers comes from updates to Care.com’s matching algorithm to address customer complaints of too much choice, to allow for better match execution.

The next step comes from optimizing Care.com’s go to market strategy. Care.com monetizes through subscription pricing plans, despite the fact that most of the jobs filled on the marketplace are long term care jobs. This means that users often subscribe for a month, locate a care provider, and churn off the platform. As Care.com goes after the 79 million unfilled short duration childcare jobs, frequency of use and pricing power supported by a superior user experience favor a shift to on demand pricing. In addition to short duration childcare jobs, Care.com has a large white space opportunity in enterprise offerings. With the COVID-19 induced work from home paradigm shift, access to childcare is quickly becoming an employee benefit requirement. Between updates to the matching algorithm, moving to on-demand pricing, rapid booking for short term care, enterprise benefit demand, senior care, and the offline to online conversion, IAC has a long runway to optimize and scale Care.com.

Fourth, Dotdash is an attractive niche business with meaningful upside from usage-based pricing. Dotdash is a portfolio of ten online publishing brands with verticals in finance, health, lifestyle, beauty and style that touch over one third of internet users every month. By focusing on best in class service content, Dotdash helps readers with specific search intent answer questions that readers are likely to always ask. In doing so, search engines and social media platforms direct traffic organically to Dotdash’s sites. Dotdash’s advantage in driving organic traffic only grows as Dotdash’s content creators continue to build upon their existing scale of content in their verticals. Secular growth in e-commerce plays into these strengths. As Dotdash’s monetization engine shifts to a usage based pricing mechanism that takes a small piece of consumer’s purchases as opposed to charging advertisers for impressions, Dotdash is able to better monetize the strength of their publishing brands, the growing quantity of always relevant content, and the value of high intent website traffic. The Dotdash flywheel of growing always relevant quality content, more users, and more revenue from users with high purchase intent transacting, all feed more internally generated cash flows to reinvest in high ROIC opportunities that strengthen earnings power.

Fifth, Turo is following the Airbnb and Uber playbook as it rides the rails of GPS and internet connected smartphones to unlock the underserved market opportunity afforded by the 1 billion cars globally that remain idle 90% of the time. Turo is the largest car sharing platform in the world. In the same way that Airbnb created a market that enabled homeowners to earn money by turning spare capacity into rentable units, Turo helps car owners share their idle cars through a user-friendly mobile application. This marketplace business has attractive attributes such as high fragmentation, disaggregated supply and demand, a large addressable market, and network effects. While we are in the early innings of Turo’s opportunity, we believe it is certainly worth more than the $250 million IAC paid for it and the $0 value ascribed to it in IAC’s valuation.

Sixth, Bluecrew and NurseFly provide free optionality on IAC’s ability to do what it has successfully done many times before; take a nascent marketplace business and use its proven expertise to eliminate friction on the supply and demand side to grow the market and take outsized share as the market converts from offline to online. Bluecrew is a marketplace that connects workers to jobs in the $131 billion temporary staffing category. With a low single digit market share but a significantly superior user experience compared to offline competition, Bluecrew has a long runway to remove user friction as it builds liquidity and takes dominant share of the market. NurseFly is an online marketplace that alleviates healthcare worker shortages by connecting skilled nurses, therapists, and healthcare professionals to employers. As IAC adds features and improves matching software to mitigate supply and demand side frictions at NurseFly and Bluecrew, improved liquidity of the marketplace facilitates scaling of the platform as the market tips from offline search to online conversion. Both NurseFly and Bluecrew are in the early innings of executing upon IAC’s proven process of driving this transition, and have a long runway to compound shareholder value.

Seventh, IAC’s recently disclosed 12% stake in MGM Resorts International (MGM) stands to benefit from IAC’s proven ability to use direct marketing expertise to help MGM drive a long runway of offline to online conversion as the online sports betting market grows nationwide. MGM owns and operates casinos, hotels and entertainment resorts that account for 35% of the available rooms on the Las Vegas strip. As online sports betting expands across the United States, MGM has a large funnel of 34 million members in the MGM loyalty program that offers a natural digital customer on ramp. MGM also has the established global brand and scale to support the direct marketing of new digital first audiences. In addition to the tailwinds provided by online sports betting, MGM offers upside to the significant pent up demand created from curtailed trips and a new NFL team and stadium for when Las Vegas fully reopens. We see reasonable scenarios where the sports betting opportunity for MGM is greater than the entire current enterprise value.

Eighth, IAC’s $2.9 billion in unrestricted cash on the balance sheet offers free optionality on the ramifications of the current SPAC boom in the financial markets. The current boom in Special Purpose Acquisition Company seems to have caused many to forget that managers get 20% of any agreed upon deal as a promote. The combination of a typical 30% acquisition premium and 20% automatic shareholder dilution due to the promote explain the poor long-term performance of the vast majority of SPACs. Incentives on the SPAC manager side that favor doing any deal before the SPAC’s expiration date, and management incentives on the selling party side that favor selling the company at what they view as an inflated price, combine to create a dynamic where many companies that should not be public at the deal price, or should not be public at this stage in their lifecycle, are being taken public. A public market that provides transparency on financials and business operations forces more appropriate valuations as the marketplace dictates what companies are worth, as opposed to the prior situation where just a small minority of incentivized private investors dictate the business valuation. IAC’s $2.9 billion in unrestricted cash and a boom in new companies going public via SPAC create a long runway of opportunity for IAC to selectively acquire busted SPACs as the next group of businesses to cultivate and scale to compound shareholder value.

In IAC, we see these eight ways to compound our investment in IAC as presenting numerous opportunities to individually create value greater than the entirety of IAC today. Collectively, they offer us a meaningful opportunity to significantly compound our investment over the long term.