InterActiveCorp is set to report 3Q13 results today after the close. While we believe it is generally understood that 3Q is expected to be a trough for the affiliate search market, reflecting the timing of implementation of certain Google policy changes, soft CPC results and limited Network revenue growth could indicate incremental pressure on IAC’s 3Q Search results. As an offset, however, Match growth is likely to accelerate through the balance of the year, which, combined with easier comparisons, is likely to drive accelerating OIBA growth as well. We are adjusting our estimates to reflect a slightly weaker 3Q and slightly stronger 4Q, leaving our full-year numbers essentially unchanged. We reiterate our belief that a valuation of 7x 2014E EV/EBITDA undervalues one of the two core assets, with IAC’s “other” portfolio likely currently being attributed no value.
We now estimate total Search & Applications revenue could grow by 18% y/y in 3Q, down from 21% prior, reflecting a combination of softer-than-expected Network Affiliate results from Google and a modest shift in the timing of revenue expectations from 3Q to 4Q. We still expect website revenue may grow by nearly 25% y/y, but application revenue may grow by 12%, slightly below 1Q13 levels at 13%. With App revenue expected to base in 3Q, we see total Search revenue maintaining mid-high teens revenue growth into 2014, even accounting for the potential of increased competition from the pending merger of Perion (PERI-Buy) and Conduit.
IAC has solid momentum and assets. We believe strong performance within Search and Match is sustainable. Our price target of $66 per share, or 8x 2014E EBITDA, is one multiple above Internet advertising peers. We believe IAC deserves a premium do to superior performance and quality operating assets. IAC has limited capital spending and generates solid free cash flow (FCF). IAC also pays a cash dividend that currently yields 2%.