Some Thoughts on Match Group

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Match Group Inc. (NASDAQ:MTCH) is a leader in the online dating business. The company owns a collection of brands, including Tinder, Match, Meetic, OkCupid, Hinge, Pairs, PlentyOfFish and OurTime. Together, these brands have nearly 10 million paid subscribers.

Match has accumulated that impressive portfolio of leading brands through a combination of acquisitions, buying OKCupid in 2011, Plenty of Fish and Pairs in 2015 and Hinge in 2018, as well internal development, most notably Tinder (which was built by IAC’s internal incubator Hatch Labs.

Through that collection of diverse brands, Match can help users around the globe meet potential partners throughout their dating life-cycles. According to the company’s annual report:

“Consumers’ dating preferences vary significantly, influenced by demographics, geography, religion and sensibility. As a result, the market for dating products is fragmented, and no single product has been able to effectively serve the dating category as a whole.”

The company’s penetration of the online dating market has increased substantially over the past five to 10 years, largely due to the global proliferation of smartphones and mobile apps. As shown below, the percentage of couples who have met their partner through online dating has increased from the low-single digits to roughly 40% over the past twenty years.

In addition, as the team at Tyro Partners LLC has noted in a great write-up on the subject, it’s likely this is understated:

“Note in the charts above the up spike in “met in bar or restaurant.” In data science, the technical term for these reporting individuals is “liars.” They reported meeting in a bar because that is technically where the pair met in person for the first time, but the match was generated online.”

But despite this tailwind, Match Group’s Other brands have not grown their paid subscriber base over the past five year, stubbornly stuck around four million paid subscribers.

That seems odd to me, and may be a data point that is worth thinking about for Match shareholders. But that stagnation has been offset by explosive growth for the company’s marquee brand – Tinder, the number one downloaded and top grossing app in the world.

The net result has been significant mix shift: Tinder, which accounted for 15% of Match Group’s revenues in 2016, accounted for nearly 60% of its revenues in 2019. This reflects outsized user growth, as well as a 60% increase in average revenue per user from 2016 to 2019). For Match Group, this has resulted in 18% compounded annual revenue growth over the past five years.

This high-teens revenue growth has flowed through the income statement, with diluted earnings per share climbing significantly over the past few years despite continued investment through the income statement (such as what the company has done with OKCupid in India).

As I noted above, the company’s non-Tinder brands (collectively) have not grown paid users over the past five years. The same applies to revenues, which have been roughly $900 million a year. At the corporate average net margins of 26%, that implies $235 million in net income. Considering that these brands have not grown, I’m going to apply a price-earnings multiple of 11 times (9% earnings yield), which I think is reasonable if you believe they can sustain these results (you can adjust the calculation as you see fit). That implies that these businesses are collectively worth $2.5 billion, with upside if they’re able to sustain or expand upon the slight growth achieved in 2019. That may be possible as brands like Hinge continue to scale.

Match Group has 295 million diluted shares outstanding. At the current price of $58 per share, the company has a market capitalization of $17 billion. Backing out the value of the other brands, that suggests that Mr. Market is valuing Tinder at roughly $14.5 billion (note that these numbers will change following the separation of Match from IAC).

For that price, you’re buying a business that has more than tripled its revenues over the past two years, from $403 million in 2017 to $1.152 billlion in 2019. Using corporate average margins as I did above, which understates the change at Tinder (margins have almost certainly expanded for the brand over the past two years), earnings have increased from $100 million in 2017 to $300 million in 2019. On a trailing basis, you’re paying roughly 48 times trailing earnings for Tinder at today’s market price. Assuming the company would’ve grown by roughly 30% – 35% in 2020 (compared to 43% in 2019), that would’ve been around 35 to 40 times forward earnings.

I say “would’ve been” because of Covid-19. Some think engagement will hold up during this crisis, or maybe even increase. For example, App Annie estimates that the number of active Bumble users increased 8% during the second week of March.

I think that’s a reasonable prediction. Using Tinder or other dating apps is a way to kill time while you’re sitting at home watching Netflix (NASDAQ:NFLX) for hours on end. However, I’m not sure this will flow through to paid subscribers. Personally, I question the logic of paying for a product that helps you find a date when in-person contact is discouraged and many of the places you are likely to meet in person, such as restaurants and bars, are temporarily closed. Most single people won’t be going on dates in the coming weeks, and that could discourage users from paying for features like Tinder Gold, Boosts or Concierge.

To be clear, I think these are short-term issues that are unlikely to have a material impact on the long-term intrinsic value of the business. My hope is that any temporary hiccups would put pressure on the stock, giving potential investors a chance to buy at more attractive prices.

My real concern is the staying power of these apps. Will Tinder still be dominant in a decade, or will it succumb to the threat presented by a long list of competitors in a fragmented global market?

Remember that Tinder, which accounts for the vast majority of Match Group’s value, didn’t exist a decade ago. And as Hinge’s founder noted in an interview a few years ago, the vast majority of its growth at the time (roughly 85%) was from word of mouth. The ability of these businesses to scale without spending significantly on marketing is a risk for incumbents.

That said, Match has done a great job acquiring a number of potential competitors in the past. That’s an acceptable concern at the right price – but I’m not sure we’re there yet. All that said, it’s worth remembering that Match owns four of the top five dating properties in the United States, with a portfolio that meets targets users across different age ranges and communities.

Those are the downside risks. The flipside of the coin is that Match, the global leader, only has ten million paid subscribers in a global addressable market that is north of half a billion people. Even at 10% penetration of a growing online dating market over the long run, that leaves a lot of headroom for growth. Combine that with more effective monetization efforts (like a la carte products) and the company could see its business expand dramatically over the next decade.

In summary, I can see the rationale for investing in Match at this price. If management can execute on the global plans that they’ve articulated, the stock will prove to be undervalued.

Personally, I’m torn on this one. I could see owning a small position today. At the same time, I am very confident that I will generate a solid return over the long run from something like Comcast (NASDAQ:CMCSA) at $34 per share or Charles Schwab (NYSE:SCHW) at $30 per share, even if that means a lower likelihood of a home run. So, maybe the answer is to make this a 1% – 2% position as opposed to the 5% to 10% weightings that I’m comfortable with on those other names.

As always, I welcome reader feedback.

Disclosure: Long Comcast and Charles Schwab.