We all know Warren Buffett, the Oracle of Omaha, and the returns he generated for shareholders in Berkshire Hathaway (NYSE: BRK.B) over the past 50 years. This stock has returned more than 3,000,000% since 1964, when Buffett took over the business operations of the original company.
Its success has also attracted an army of investors who love Buffett’s style of capital allocation, making it one of the most popular stocks for investors even in 2022.
But given Berkshire’s enormous size and maturity (its market cap is over $700 billion), some young investors looking to build their nest eggs over the next few decades might not be as enticed by it as a investment.
Enter InterActiveCorp (NASDAQ:IAC). The internet-focused conglomerate has outperformed Berkshire Hathaway since its inception in 1995, has a much smaller market capitalization of $12 billion and is currently trading at a reduced valuation.
Here’s why investors should consider buying IAC in 2022.
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What is the IAC?
IAC is a holding company established by Barry Diller in 1995. Originally called Silver King, the company began investing in internet and entertainment businesses, eventually building and building businesses such as Expedia, TripAdvisor, and National Live Entertainment. More recently, he launched his very successful Matching group and Vimeo units.
These moves highlight IAC’s core strategy. Unlike Berkshire Hathaway, which rarely sells the companies it owns, IAC prefers to acquire assets, incubate them, give them the benefit of its decades of expertise in building internet businesses, and then turn them into public companies once are large and stable enough to operate on their own.
Currently, IAC’s interests include an over 80% interest in Angi, a $2.5 billion stake in MGM, a 27% stake in start-up Turo, and a catalog of wholly-owned companies including Dotdash, Care.com, and numerous small businesses. Finally, at the end of the third quarter of 2021, IAC had approximately $3.4 billion in liquid assets – a large bankroll that gives it the flexibility to make more investments or acquisitions if it finds attractive opportunities.
The deal with Meredith Publishing was a smart buy
Speaking of acquisitions, IAC recently completed its $2.7 billion purchase of Meredith Publishing. He funded that deal with $1.6 billion in debt and $1.1 billion in cash, so that move drained a good chunk of IAC’s cash. The debt, however, will be held by combined subsidiary Dotdash Meredith, a tactic that gives IAC more flexibility at the parent company level to continue making investments.
Meredith Publishing owns many magazine and website brands, including People, better homes and gardens, and southern life. It will combine with Dotdash’s current publishing assets, which include Investopedia, The Spruce and TripSavvy. IAC’s thesis for the acquisition is that it can easily improve Meredith’s websites using the same strategies it used for those operated by Dotdash. This includes improving site speed, reducing overall ad load, and increasing sales and performance marketing campaigns.
This playbook has helped Dotdash grow revenue at a compound annual rate of 32% since 2018, reaching $264 million in revenue and $88 million in adjusted EBITDA over the past 12 months.
Better than Buffett and trading at a discount
What excites me about investing in IAC is the company’s strong track record and relatively cheap stock valuation.
Since 1995, when IAC was founded, the company’s annualized total shareholder return (including benefits) has been 15.3%. This compares to a return of 10.4% for the S&P500 and a return of around 12.6% for Berkshire Hathaway over the same period. Given its small size and expertise in internet business, it’s no surprise that IAC even beat the Oracle of Omaha during this time.
I believe IAC can continue to deliver equally strong returns to shareholders in 2022 and beyond. If you evict its minority stakes in publicly traded companies (Angi, MGM and Turo) and the cash and debt it will have in its various companies, the company has an enterprise value of $5.5 billion. . Over the past 12 months, revenue from companies wholly owned by IAC (Dotdash, Care.com, etc.) plus Meredith was $3.7 billion. This gives the stock an enterprise value to sales ratio of around 1.5.
Given that these companies have high profit margins, this indicates to me that IAC’s wholly-owned companies are currently undervalued by investors. For anyone looking for a large conglomerate to own in 2022 and beyond, this could be a fantastic time to pick up shares of IAC.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.