I’ve written about self-proclaimed anti-conglomerate Interactive Corp. (IAC) a few times in this newsletter, and it remains one of my favorite stocks. I think CEO Joey Levin is a great steward of capital and him and chairman Barry Diller have a history of building great businesses and spinning them to the public markets (most recently Match.com). It has been one of my best performers over the last year, and I credit Levin for actually making me buy the stock based on his shareholder letters, which frequently make the case that IAC’s “stub” value (value after public securities and cash are removed) is too low.
On Monday, Vimeo will spin off from IAC at a valuation around $10bn. As background, Vimeo is (well, was) IAC’s crown jewel, and the IAC team deserves a ton of credit for growing its value, as well as CEO Anjali Sud and the folks at Vimeo. This company in the private market raised at a $6bn valuation in January and $2.75bn last November. IAC itself clearly was a little surprised at what investors were willing to pay here, as Levin wrote back in November:
We don’t normally think in terms of revenue multiples, but we found real appetite among investors who do – we had more interest in Vimeo than the number of shares we were willing to let Vimeo sell.
Now, they’ve found a public market willing to value the company at 27x forward sales. Anjali on the last call guided towards the company being able to grow the top line at 30% for the next few years, but even if these expectations are met, the stock still looks rich to me if I want a 15% return from here:
So even given an optimistic growth projections and 5-years-out EBITDA margin, the company still looks rich 5 years down the line to me at ~35x EBITDA in 2026. A lot can happen in 5 years, and any deceleration in growth will cause Vimeo to come down a lot I’m guessing – we’re seeing that happen now as growth stocks that don’t meet expectations like Fastly are drawing down 40%+ in some cases. The price of Vimeo in the public markets simply implies expectations that I’m not comfortable with, and I don’t see a world where the stock can appreciate at my hurdle rate.
Pre-mortem on this trade – Vimeo surprises to the upside with growth in the 50%+ range and the business turns out to be more profitable than anyone imagined. I wouldn’t rule this out, but I’m not willing to bet on it. I also acknowledge that I’m breaking one of my own rules – never sell a business where your best argument against it is valuation. I have been burned on trades where I sell because something seems too rich for me, but that said there’s a great difference between being sticker shocked at 27x forward earnings and sticker shocked at 27x forward sales. Additionally, I believe I can find the same type of growth I’m getting with Vimeo at a lower price (anyone look at FAANG growth v. valuation recently?), and I’d rather park my capital there.
I’ll continue to hold onto IAC post-spin as I deeply believe in management’s ability to keep executing on its playbook of building great companies and selling them to the public markets. DotDash has been showing great operating performance recently and is a candidate for a future spin. The company still has nearly $3 billion in cash it can use to acquire great businesses and grow them over time. Most importantly, Diller and Levin are best in class capital allocators I’m willing to pay up for.