Interactive Corp. (IAC 0.45%) has a strong history of buying businesses, building them up, and then spinning them out as separate entities. Its most successful venture turned into Match Group, the dating app conglomerate that is now worth almost $40 billion. Just this week, IAC spun off another one of its subsidiaries, a video software company called Vimeo (VMEO 1.72%). Given the company's strong track record, should investors buy this latest IAC spinoff? Let's take a look.
What is Vimeo?
Vimeo's goal is to provide professional video tools to anyone. Originally focused on becoming a YouTube competitor, CEO Anjali Sud pivoted the company's strategy once she realized Alphabet had the consumer video market locked up through YouTube. So Vimeo is a software platform that lets creators and businesses produce, manage, and live-stream videos from a central hub. It has big customers, including Spotify, Amazon, and The New York Times.
Paying customers can easily publish videos to all the major social platforms, saving a lot of time and stress for anyone managing multiple social media accounts at large companies. Vimeo can also help companies post internal videos for training and educational purposes or easily live-stream town halls to their employees. Other products include customizable video playlists on websites and the ability to build subscription paywalls for video content.
Vimeo has four different subscription tiers for paying customers, ranging from $7 to $75 a month. Large enterprises (Spotify and Amazon are good examples) can work out custom contracts with Vimeo if they need more capabilities than its highest standard tier.
The financials check out
Before Vimeo started trading as a separate stock, IAC published some of its financial results so potential investors would know exactly what they're getting. In the first quarter of 2021, Vimeo's revenue hit $89.4 million, up 57% year over year. This brings the company's trailing 12-month revenue to $315.6 million.
Looking deeper into the results, total subscribers grew 25% to almost 1.6 million during the quarter, while average revenue per user (ARPU) increased 27% to $233, and gross margin expanded year over year from 68% to 72%. All of these numbers are moving in the right direction, and they indicate that Vimeo's products are resonating well with customers.
The high gross margin also shows that Vimeo has the potential to generate attractive profits and cash flow once it scales. Right now, the company is operating at around breakeven since it is investing heavily for growth, but management has guided for long-term adjusted EBITDA margin to be above 20%. It also guided for both subscribers and ARPU to deliver a compound annual growth rate (CAGR) of 15% over the next five years, which would lead revenue to grow at a CAGR of 30% or more over the same period.
But is the stock a buy?
At a current market cap of around $6.7 billion and with revenue of $315.6 million in the past year, Vimeo stock has a price-to-sales ratio (P/S) of 21.2. This is expensive compared to the average enterprise software stock, which typically trades at a P/S closer to 10 or 15. Given this premium valuation, it might be best for investors to wait on buying Vimeo shares, or only taking on a small position to start, even if you are bullish on the business over the long term. While Vimeo sits on your watchlist, you can continue to track its progress as a public company over the next several quarters before committing more of your portfolio to the stock.