Coming off one of the stock market's worst years in a long time, there are some promising undervalued growth stocks to consider buying at the start of 2023. But I would keep my eye on one overlooked gem in the consumer area.
IAC (IAC -1.04%) is one of the most promising growth stocks that no one talks about. IAC is basically a holding company of consumer products and brands. The company has acquired and spun-off many businesses over the years since its founding, turning a $100 investment in 1995 into $4,000 at the stock's peak in 2021.
The stock is currently trading 71% below its all-time high. The market could be significantly undervaluing the company's future growth, particularly the huge opportunity with one of its top brands, the home services provider Angi (formerly Angie's List).
Angi can grow for many years
IAC has a long record of acquiring top brands with long-term growth potential. The company used to own Ticketmaster, Expedia, and Match Group, but today its mainly comprised of Angi, Care.com, and Dotdash Meredith, publisher of People, Food & Wine, and Southern Living magazine, among others.
A breakdown of the company's revenue shows Dotdash Meredith as the largest revenue source right now, but Angi has the most attractive long-term growth prospects.
Angi matches homeowners with professionals for cleaning, remodeling, and landscaping. The company estimates the total addressable market at $657 billion. In 2021, Angi services revenue more than doubled, validating the enormous opportunity in front of it.
However, after IAC's total revenue grew 34% in 2021, growth slowed last year as the economy reopened. Angi's total revenue increased by just 6% year over year in the fourth quarter, with IAC's total revenue up 8%.
The slowing growth and concerns over the macroeconomic headwinds and impact on consumer spending sent the stock plummeting last year. With the stock's price-to-sales (P/S) multiple falling to 0.87, representing a significant discount to the average stock's P/S ratio of 2.34, investors are getting a major bargain, especially as management implements a plan to increase profitability this year.
IAC PS Ratio data by YCharts
A brighter outlook for 2023
The booming growth at Angi during the pandemic taught management that simple services have strong consumer appeal and the highest-margin opportunities for the business. To improve growth and margins at Angi, management has started to focus on offering high-volume, repeatable, and lower-cost jobs, while exiting more complex jobs.
In addition, management is cutting operating expenses and capital expenditures. The company believes it now has a leaner "elite team" in place to execute this year. "Profitability and free cash flow ought to improve meaningfully this year as we drive higher gross margin revenue lines, eliminate inefficient operating expenses, and rationalize excessive capital expenditures," the company said in the fourth-quarter earnings report.
Moreover, acquiring other companies is central to IAC's growth strategy and why it's been able to deliver market-beating returns to shareholders over the past few decades. The downturn in the markets could allow management to buy quality businesses on the cheap. This is a catalyst to watch in the near term.
Regardless of any acquisition opportunities, the improvements underway to unlock more value at Angi are enough reason to buy the stock at these discounted share prices.
One previous bear on Wall Street at UBS has already upgraded the stock from a sell to a neutral rating, while 93% of analysts that cover IAC rate the stock a buy. An IAC bear turning neutral is another sign that the stock has hit bottom and is ready to move higher.
