Dark Skies on the Horizon for IAC
Goldman Sachs downgraded InterActiveCorp (NASDAQ: IACI) from Neutral to Sell today based on a rising risk profile for the search market. Search-related revenue for IAC faces serious risk from increasing competition in search arbitrage and the potential risk from search redirection policy changes.
Goldman lowered its 12-month price target from $53 to $42. Demand Media (NYSE: DMD), which has a similar business model to that of IAC, was also included in the report with a downgrade from Neutral to Sell and a reduced price target from $12 to $9.
The search segment of IAC represents a whopping 52 percent of revenue and 65 percent of operating profit. This segment faces increased competition from AOL (NYSE: AOL) and Demand Media as they have launched programs similar to IACs of buying search ads that direct users to similar search results pages on Ask.com.
Google's (NASDAQ: GOOG) recent changes to its policies reflect its desire to maintain a positive user experience and search arbitrage may come to be viewed as harmful to that experience. While Google does have a policy against arbitrage, search sites that provide content alongside ads are currently excluded.
IAC's toolbar business faces a rough future as it depends on desktop usage from Internet Explorer and Mozilla Firefox. Browser market share is continually declining for both IE and Firefox down to 54 percent and 20 percent in October compared to 61 percent and 24 percent in 2010. Google's Chrome browser is gaining share at 19 percent, up from nine percent in 2010.
Accompanying this browser market share battle is the massive platform shift to mobile computing via smartphones and tablets. Some 10 percent of consumers' time is now spent on mobile devices, with which IAC's toolbars are incompatible.
On October 24, 2012, IAC reported Q3 results of a 38 percent revenue growth over last year, but also a GAAP diluted EPS change of -38 percent. One potential bright spot for IAC is the acquisition of The About Group in September 2012, which will be reported effective October 1, 2012.
In mid-day trading Tuesday, IAC was down 8.50 percent at $43.17 a share. DMD was similarly down 9.32 percent at $8.37 a share.
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