Many companies have tried to copy the conglomerate model run by Warren Buffett at Berkshire Hathaway (BRK.A -1.11%) (BRK.B -1.33%). Few have succeeded. It is extremely difficult to beat the market consistently over multiple decades the way Berkshire has. The stocks that succeed at it can create life-changing returns for shareholders.
IAC (IAC -3.49%) is one such select company that started its spree of acquisitions 25 years ago. The stock also happens to be a great buy-and-hold opportunity today for investors looking to safely build their wealth over the long term.
IAC is a true "Baby Berkshire." Here's why -- after seeing its stock fall 50% over the past year -- it might be the cheapest stock in America.
What is IAC?
IAC was formally started in the 1990s by Barry Diller, a longtime television executive who wanted to start investing in the internet. This turned out to be perfect timing, as the internet has come to dominate our culture in the 25 years since.
Diller set up a culture at IAC with the strategy of purchasing businesses (or stakes in businesses), incubating them, and spinning them out as their own stand-alone stocks. This is different from Berkshire Hathaway, as Buffett & Co. typically likes to keep all their acquisitions under one corporate umbrella, but it's still a fantastic strategy to create shareholder returns (if run intelligently).
Luckily for IAC shareholders, Diller and his team have shown to be quite intelligent when buying and building internet assets. Large companies like Expedia, Live Nation, and Match Group were built up while under the IAC umbrella and then re-IPO'd for a significant profit. The process has helped IAC turn every dollar invested since 1995 into $25, according to a June 2022 investor presentation.
Since that presentation, IAC's stock has taken a tumble due to a few poor quarters from its Dotdash Meredith subsidiary, which is now its most meaningful operating business by a wide margin. But I think Wall Street has gotten much too pessimistic about IAC due to short-term issues, presenting a great entry point for buy-and-hold investors.
Look at the total value of its assets
It is impossible to value IAC on a standard price-to-earnings ratio (P/E) since it is really just a collection of wholly and minority-owned businesses in different growth stages. For example, it has a majority stake in Vivian Health. This is a company it incubated a few years ago that is truly just a start-up trying to go for hypergrowth right alongside its Ask Media division, a legacy internet business in structural decline that might not be around in a few years but will still generate a little more in cash flow that IAC can redeploy into other investments.
As of this writing, IAC has a market cap of $4.7 billion. If we back out of its public investments in MGM Resorts and Angi, subtract out its $1.7 billion cash balance, and add back its $2.1 billion in debt, we come to an enterprise value of approximately $1.2 billion. Estimate the value of its approximately 35% stake in Turo at $500 million and its majority stake in Vivian Health at $300 million, and that enterprise value comes down to $413 million.
What is left over for shareholders at an enterprise value of $413 million? Quite a bit, actually. First, you are purchasing 100% of Dotdash Meredith, an online publishing business whose revenue was close to $2 billion in 2022.
Dotdash Meredith's revenue declined in 2022, but according to management, this was due to lapping the COVID-19 boost for online advertising and its revamp of numerous sites it purchased from Meredith Publishing in late 2021. The site changes cause short-term revenue declines, which should not repeat in 2023.
The division is not very profitable at the moment, but management thinks it can achieve 20%-plus adjusted profit margins over time and steady growth. This would mean hundreds of millions in profits generated each year for IAC shareholders just from this subsidiary.
Outside of Dotdash Meredith, IAC owns the aforementioned Ask Media division, which isn't worth much more than a few hundred million dollars but is not worth zero. It also owns Care.com, an online marketplace it bought as a distressed asset a few years back that has now been built into a business closing in on $500 million a year in high-margin revenue. Combine these three assets together, and I think it is clear they are worth more than $413 million today.
Stay patient and trust the executive team
The pieces of the IAC puzzle can get confusing if you try to pinpoint their exact combined value when, truthfully, these are all just estimates. But generally, I think it is highly likely this baby Berkshire is worth much more than its current $4.7 billion market cap. And with a seasoned executive team that should reinvest intelligently and rationally for shareholders, I am very comfortable owning IAC and betting it can beat the market over the next 10 years and beyond.
