InterActiveCorp is set to report 4Q13 results tomorrow before the market opens. Shares have risen steadily following soft 3Q Search results as a company-wide reorganization in December sparked expectations of a pending Match.com spin-off. We do not currently anticipate a spin announcement tomorrow, the absence of which could drive shares lower despite extremely low fundamental expectations, particularly regarding Search.
However, even using conservative assumptions with regards to Search and Match, we believe we can easily justify an $80 per share price target using a sum-of-the-parts valuation, assigning a 6x multiple to Search, a 12x multiple to Match and $600 million in value for Vimeo and HomeAdvisor, which we also suspect is conservative.
We believe investor expectations for the affiliate search space continue to remain extremely muted, with many outlooks calling for mid-single digit growth at best and several calling for the industry to disappear entirely. Google’s 4Q results likely reinforced the bears, with total TAC up 3% y/y and network TAC up 2% y/y, although both improved sequentially, which matches our expectations.
We suspect Google’s recent results may prove less telling for the overall industry given the traffic shift to alternative monetization paths during 2013, however we also acknowledge IAC’s over-indexing to Google, which we believe is reflected in our estimates, calling for a 5% y/y revenue decline in Search in 4Q and only 7% y/y growth for FY14, at the low end of guidance. We suspect results should improve sequentially over the course of the year, with IAC retaining the option to diversify its monetization base depending on the pace of recovery.
Speculation of a Match.com spin-off has increased materially since the December management reorganization. We do not believe a spin-off is imminent. We also believe investors expect an acquisition would be required to meet the high-end of management’s long-term outlook, calling for Match to approach $500 million in OIBA by the end of 2016. We believe Spark Networks (LOV-Not Rated) remains the obvious choice, although we believe historic attempts to acquire Spark have failed due to significant valuation differences.
Regardless, we forecast Match will grow revenue organically at a mid-teen pace, benefiting from steady double-digit sub growth at core Match and expanding growth in non-core subs. We also project OIBA margin could expand by at least 100bps per year as revenue per sub improves in non-core assets and operating leverage is achieved through economies of scale.