InterActive's Fall Isn't Finished

IAC/InterActiveCorp (IACI - commentary - Cramer's Take) CEO Barry Diller has no right to be angry. But his investors, who until Tuesday had believed that the feted executive was building a fabulously profitable e-commerce empire, most certainly do.

In an embarrassing display of CEO bluster, Diller turned grouchy on a Tuesday evening conference call discussing IAC's lackluster second-quarter numbers and reduced profits forecast. At one low point, he told an analyst that his expectations for IAC should be "damned."

The source of Diller's frustration seems obvious. His dreams of making IAC, which owns Expedia and Hotels.com, into a fast-growing, travel-focused Internet giant now seem well out of reach. Detox expressed serious doubts about IAC's travel business back in February.

The company didn't reply to questions sent by email, but Wall Street's reaction Wednesday spoke volumes about how Diller's outburst was received. IAC stock, already well off its 52-week high, plunged a bruising 16% to set a 52-week low.

Clearly, investors no longer believe that IAC can increase profits annually by 30% -- a rate Diller and his team proudly forecast just nine months ago for the 2003-to-2008 period. Indeed, with 2004 operating profit guidance being cut to $1 billion from a $1 billion to $1.2 billion range, IAC's growth rate this year will likely be a far more pedestrian 16%.

If growth stays at that level or continues to slow -- which is more likely, given the harsh conditions in the online travel market -- IAC's stock deserves to trade even lower. An appropriate valuation would price the stock in the midteens, some 30% south of Wednesday's closing price of $22.80.

Falling Star

The big problem with IAC is that it can't grow at the stellar rates it aims to in online travel. The company massively underestimated just how competitive this business is and made the classic Internet company mistake of extrapolating one good year's numbers out into the distant future.

Gross travel bookings in the second quarter were $3.39 billion, short of analysts' expectations and below the first-quarter figure of $3.49 billion. In 2003, by contrast, gross bookings rose between the first and second quarters.

Net revenue, which excludes the money that IAC has to pass back to the hotel room and air ticket providers, was $555 million in the second quarter, also below expectations.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to [e-mail].