Renowned investor Barry Diller has created the anti-conglomerate in Interactive Corp (NASDAQ:IAC) by sticking to his playbook of acquiring a business, growing that business, and spinning it out. That is his key to unlocking immense value for shareholders, and he’s about to do it again with another promising company: high-end video-sharing site Vimeo.
The latest chapter in IAC’s playbook
IAC buys into nascent, online companies, with clear momentum. But instead of holding onto these subsidiaries forever, IAC sets out to build them into industry leaders and eventually spin them off as stronger, stand-alone companies. That is exactly what Diller and company is planning to do in the second quarter of 2021 with Vimeo.
Vimeo helps businesses of all sizes create and share professional-quality videos, both online to everyone, or within an organization. It makes money off subscription fees from its individual and corporate subscribers. Unlike YouTube, Vimeo focuses on more artistic video creation for filmmakers and businesses, rather than enabling vlogs or viral videos.
IAC will divest Vimeo through an initial public offering because it believes Vimeo will attract more funding as an independent company via a higher valuation of its shares or low-interest debt from lenders. Most importantly, a good spinoff will allow Vimeo management to devote their full attention to the company’s own operations and growth.
Investors in IAC will receive shares of Vimeo in the form of a tax-free stock dividend, so they will see shares of both IAC and newly public Vimeo in their brokerage accounts. Investors should also expect to see the IAC shares drop. Don’t be alarmed! The drop in value and the new shares of Vimeo will total up to the pre-spinoff value — unless, of course, the market quickly bids up the new asset so that the two stocks equal more than the pre-spinoff value of IAC.
Vimeo’s ability to forge relationships and establish its platform within major companies gives it an advantage above other competitors trying to mimic its products. Fortifying its competitive positioning, Vimeo offers filmmakers and businesses better, more robust tools and management systems within its video platform that would take competitors tons of money and time to replicate. The video platform business has been growing fast, and the pandemic only accelerated its use cases within businesses. Vimeo revenue grew from $103 million in 2017 to $283.2 million at the end of 2020 — compounding at an average annual rate of almost 40%.
Furthermore, the company appears to be turning profitable — not typical for a fast-growing software company. It still lost money for the whole of fiscal 2020, but in Q3 of 2020, Vimeo generated $3.4 million of income on an adjusted EBITDA basis and continued the trend into the fourth quarter with an adjusted EBITDA of $1.5 million. The best part, according to management? Profitability was an accident. In the third-quarter shareholder letter, CEO Joey Levin mentioned that revenues grew so fast, the company could not increase investments quickly enough to keep pace with it. That only reconfirms the momentum Vimeo is seeing.
Also, as work-from-home becomes standard, video communication and collaboration are likely to make their way into every business in some capacity. Vimeo positioned itself to capitalize on that opportunity. The enterprise segment is more than doubling revenue from last year as companies turn to Vimeo to help business continuity. Nasdaq (NASDAQ:NDAQ) and the New York Stock Exchange started using Vimeo to live stream the closing and opening bell and expanded the platform for townhalls, conferences, and company interviews. Starbucks (NASDAQ:SBUX) turned to Vimeo to onboard new employees and train staff. The use cases for Vimeo’s platform are only increasing.
Getting in early
Investors have a unique opportunity to finally get into a fast-growing, high-quality business before it goes public. By investing in IAC, a company with an outstanding 25-year track record of value creation for shareholders, investors can receive Vimeo shares at the IPO price.
The pandemic has taken the world by storm, forcing businesses to get creative in how they advertise, communicate, and collaborate, providing Vimeo a long runway for growth and innovation. As the established platform in many large enterprises, Vimeo is likely to take on a more critical role in businesses and grow into a much larger company than today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.
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