Swiping Right On Match Now

What happens to dating when everyone is quarantined? It moves online, of course. We’ve always loved the Match Group (MTCH) subscription business model, but the company has always been too expensive over the past few months, trading at close to a 50x PE despite just modest growth. Well, now the company has fallen substantially from highs and is trading at just over 30x PE, making it much more attractive to buy.

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Dating in a pandemic

With a large portion of the US population confined to their houses, and with most of the restaurants and bars in the country closed, it may seem like little or no dating is now occurring. However, with the widespread use of mobile phones, most potential partners can still contact each other through their dating apps, even while in quarantine. Sure, meetups and actual dates are not an option, but online dating is still better than no dating at all.

The actual data shows that Tinder downloads have increased by 13% in the US over the past week, but most other dating apps saw a decline in downloads worldwide. It is not clear why this is the case, but our guess is that bored singles with nothing to do default to downloading Tinder as it is the most popular dating app.

2019

In 2019, Match continued its strong growth momentum, mostly led by Tinder, which grew 43% in the year. Tinder has seen incredible success over the past few years as it has become the number one dating app worldwide, but management believes there is still room for improvement through multiple initiatives, like switching to a pay as you go model in Asian markets or adding additional features.

First, the team has some great ideas in the works for ALC, a la carte, or consumable features which will give users, especially power-users, additional advantages and benefits on Tinder. These premium features will be offered with appropriate premium pricing.

Second, as we have been studying a number of our developing markets, particularly in Asia, it’s clear that reoccurring subscription models are not the way consumers predominantly transact. Pay-as-you-go and in-app currency models are more popular ways for consumers to pay. Therefore, the Tinder team is hard at work on new monetization approaches to better serve these markets with models that are more typical in these geographies.

Source: Q4 2019 call

Tinder should likely continue its double-digit ascent as it continues to increase its reach in emerging markets like India. However, the main growth driver for the future could be from other brands, which have stagnated over the past few years. Historically, other brands mostly include slow-growing web-based dating applications like Match.com, but recently management has started to incubate fast-growing mobile apps like Hinge or Pairs. Hinge, for example, has shown 100% YoY growth in downloads.

In 2019, the Hinge team was focused on refining the product and user experience, while driving further growth with 2 exciting and creative brand campaigns. These products and marketing efforts allowed us to grow downloads over 100% year-over-year. I’m extremely pleased with the progress made at Hinge as it has quickly become a leading app in the extremely competitive North American and UK markets.

Source: Q4 2019 call

Apps like Hinge have strong conversion and ARPU potential when compared to Tinder, which means that the monetization potential is truly enormous if Match just copies the monetization mechanics of Tinder.

Source: Q4 2019 presentation

Even the slower-growing business like OkCupid are seeing improving growth, with the business showing 8 quarters of 10% YoY growth as they have expanded internationally.

OkCupid has made huge strides not only in international growth markets such as India, but also North America. The business has achieved 8 consecutive quarters of around 10% year-over-year growth. This has been driven by a combination of refocusing the product on its core features and running provocative marketing campaigns, and these campaigns once again have people buzzing about OkCupid.

Source: Q4 2019 call

What all this shows is that even if Tinder growth does fizzle out, which we believe is quite likely given it has already seen several years of breakneck growth, Match should still be able to accelerate growth using its other apps.

As for margins, they’re healthier than ever. EBITDA margins for 2019 were 38%, and management believes there is room to increase further as $38mil in legal expenses for the year fade and as other brands start to contribute more to revenue.

Valuation

Currently, MTCH trades at around 21x adjusted EBITDA. While this may seem high, considering MTCH has a long growth runway ahead and considering most of the revenue comes from high-quality subscription revenue, we believe this multiple is more than fair for such a high-quality company.

We are aware that short seller Kerrisdale Capital recently wrote a short report on MTCH, talking about the legal risk it faces for deceiving consumers. Kerrisdale estimates that $70mil of MTCH’s annual EBITDA came from fraudulent sources.

While we agree with most of their points, we should note that the valuation of Match has gone down substantially since their report. Also, around half of Match’s revenue comes from international markets and Match is diversifying its revenue base away from Tinder, so even if the company is forced to change its business model in the US, we believe the lower valuation already accounts for much of this risk.

To further reduce risk, we have bought IAC (IAC) shares instead of MTCH shares. Since IAC is planning to spinoff its MTCH shares soon and since IAC has a conglomerate discount, buying MTCH shares through IAC should be much cheaper compared to buying MTCH directly.

Takeaway

Overall, we would swipe right on Match at its current valuation. People are forced to date online now, especially since they’re cooped up in their houses, and this is going to benefit Match in the short term. Over the long run, Match has many growth catalysts like international markets or its other apps that should allow it to continue expanding revenue and margins.

Disclosure: I am/we are long IAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

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