IAC currently trades at $34.28 per share and has shown little upside over the past six months, posting a small loss of 2.7%. The stock also fell short of the S&P 500’s 6% gain during that period.
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Why Do We Think IAC Will Underperform?
We're cautious about IAC. Here are three reasons we avoid IAC and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, IAC struggled to consistently increase demand as its $2.39 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for IAC, its EPS declined by 19.1% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
IAC’s five-year average ROIC was negative 2.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.
Final Judgment
IAC doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 19.4× forward P/E (or $34.28 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of IAC
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