IAC Overvalued After Angie's List Buy

The acquisition of Angie’s List by IACs (IAC) HomeAdvisor was completed on Sept. 29. What we believe to be one of IAC’s moatier businesses (although we reiterate our no-moat rating for the company as a whole), HomeAdvisor, is now ANGI Homeservices, as stated in the acquisition announcement in May 2017. In addition, ANGI Homeservices began trading under the ticker symbol ANGI on Oct. 2. The market has reacted positively to this news as both ANGI Homeservices and IAC, which maintains an 87%-plus ownership of the firm, are up 4% and 2%, respectively. While we have assumed accelerating top-line growth and further margin expansion because of the combined companies in our IAC model, we continue to view IAC shares, which are trading at a 1.20 P/FV, as overvalued.

We think such valuation is pricing in ANGI Homeservices hitting its revenue growth and margin expansion targets, while our assumptions are slightly lower. While ANGI Homeservices targets a five-year compound annual growth rate of 20%-25% in 2018-22, we expect slightly lower growth mainly due to a higher assumption of the overlap of the two previous companies’ service professionals. We are also a bit more conservative since such a combination is likely to attract larger players such as Alphabet’s Google or Amazon to the $400 billion home-services market.

Further, given that 90% of the home-services market is offline, we think ANGI Homeservices needs to market and speed up online transition more aggressively. In our view, this could prevent EBITDA margin expansion from hitting 35% by 2021 or 2022, which is what ANGI Homeservices is targeting.

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