With supply chain tensions around the globe, the war in Ukraine, and the threat of the Federal Reserve raising interest rates, many investors are worried a bear market could be on the table. A bear market is generally defined as a 20% drop in the market from recent highs. Right now, the S&P 500 is down 6.5% from its highs at the start of 2022, so we are still far away from a bear market being triggered. But as investors, what the stock market did in the past should be irrelevant to you. All you should be concerned about is preparing your portfolio for the future.
If you're worried about how your portfolio might do in a bear market, then you should check out InterActiveCorp (IAC -0.14%) stock. Here's why.
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What is InterActiveCorp?
InterActiveCorp (or just IAC) is a conglomerate of wholly owned and minority interests in internet and entertainment brands. These include an 80%+ stake in Angi worth $2.29 billion, a stake in MGM worth $2.7 billion, and many other smaller assets.
Unlike many other conglomerates, which acquire businesses with the intent of keeping them forever, IAC's strategy is to buy companies, build them up, and then spin them out as separate public companies when they are ready to operate independently. Its track record of creating value through this strategy is phenomenal. From 1995 through October 2021, IAC has grown value for shareholders (including spinoffs) at a compound annual growth rate (CAGR) of 15.3%. For every $1 you invested with the business in 1995, it is worth over $40 today, compared to only $13.09 for investors in the S&P 500.
The most famous acquisition and then spinoff is Match Group, the leading online dating company. Match.com was originally acquired in 1999 and has acquired and built the majority of popular online dating services around the globe. In 2020, Match Group was spun out as a separate publicly traded stock and currently has a market cap of $27 billion.
Underrated acquisition of Meredith
Outside of the large stakes in Angi and MGM, the majority of IAC's business today is a subsidiary called Dotdash Meredith. Meredith was an independent publishing company that IAC acquired for $2.7 billion in cash near the end of 2021. It owns assets including People magazine, Better Homes & Gardens, and Food & Wine.
On its face, acquiring some legacy magazine assets does not seem like a smart move, but Meredith has been slowly improving its online magazines, growing digital revenue at a 15% CAGR since 2018. Meredith is now combined with IAC's Dotdash, a similar publishing business that owns websites like Investopedia and Lifewire. Dotdash is a lot smaller than Meredith and is only a digital publisher, but has grown its revenue at a 32% CAGR since 2018, or more than twice that of Meredith's digital business over the same time period.
IAC's thesis is it can take its expertise in digital publishing that has allowed Dotdash to thrive and apply it to Meredith's digital assets, accelerating digital revenue growth. IAC thinks that the combined Dotdash/Meredith business can grow at 15%-20% a year and achieve $450 million in digital EBITDA in 2023.
With an enterprise value of $3.5 billion when you ex-out the stakes in MGM, Angi, and a stake in Turo held at $250 million, IAC trades at only 7.7 times Dotdash/Meredith 2023 EBITDA estimates. For a company with such a strong track record of creating shareholder value like IAC, this seems like a big discount.
Why IAC will thrive in a bear market
IAC should thrive in a bear market for a few reasons. First, the fact that it already trades at a single-digit multiple to Dotdash/Meredith's future earnings power should give it a higher floor than other stocks that may trade at 30x or 40x earnings right now.
Second, IAC has $2.1 billion in cash on its balance sheet that it can use to acquire companies on the cheap during a bear market. Start-up valuations have already started to depress, and if things continue on this trend, IAC could possibly pick up some quality businesses on the cheap. This balance sheet and capital allocators mindset makes IAC an antifragile business, which means it is able to strengthen its business when times get tough.
Lastly, IAC has 8 million shares outstanding under its share repurchase program. If the market decides to sell off its own stock during a bear market, management can buy back shares at heavily discounted prices. This can create value for remaining shareholders by increasing the percentage of IAC's business attributed to each share owned.
We didn't cover everything about IAC's business today, including the fast-growing Care.com, Vivian Health, and BlueCrew businesses, so make sure to check out its investor relations page before investing in the stock. But with a discounted valuation, a strong track record of creating value for shareholders, and an antifragile balance sheet, IAC stock is poised to thrive if we head into a bear market.
